Motivating Supplier Social Responsibility Under Incomplete Visibility
Name
SSRN-id3028117.pdf
Description
Accepted version
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633.05 KB
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Author(s)
Kraft, Tim
Valdés, León
Zheng, Yanchong
Date Issued
November 2020
Journal
Manufacturing and Service Operations Management
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Citation
Kraft, Tim et al. "Motivating Supplier Social Responsibility Under Incomplete Visibility." Manufacturing and Service Operations Management 22, 6 (November 2020): 1107-1286. © 2020 INFORMS
Version
Author's final manuscript
Abstract
Problem definition: We examine how a profit-driven firm (she) can motivate better social responsibility (SR) practices by a supplier (he) when these practices cannot be perfectly observed by the firm. We focus on the firm's investment in the supplier's SR capabilities. To capture the influence of consumer demands, we incorporate the potential for SR information to be disclosed by the firm or revealed by a third party. Academic/ practical relevance: Most firms have limited visibility into the SR practices of their suppliers. However, there is little research on how a firm under incomplete visibility should (i) invest to improve a supplier's SR practices and (ii) disclose SR information to consumers. We address this gap. Methodology: We develop a game-theoretic model with asymmetric information to study a supply chain with one supplier and one firm. The firm makes her investment decision given incomplete information about the supplier's current SR practices. We analyze and compare two settings: the firm does not disclose versus she discloses SR information to the consumers. Results: The firm should invest a high (low) amount in the supplier's capabilities if the information she observes suggests the supplier's current SR practices are poor (good). She should always be more aggressive with her investment when disclosing (versus not disclosing). This more aggressive strategy ensures better supplier SR practices under disclosure. When choosing between disclosing and not disclosing, the firm most likely prefers not to disclose when the supplier's current SR practices seem to be average. Managerial implications: (i) Greater visibility helps the firm to better tailor her investment to the level of support needed. (ii) Better visibility also makes the firm more “truthful” in her disclosure, whereas increased third-party scrutiny makes her more “cautious.” (iii) Mandating disclosure is most beneficial for SR when the suppliers' current practices seem to be average.
MIT Department
Sloan School of Management
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DOI of Published Version
https://doi.org/10.1287/msom.2019.0809
