Coordination for Assembly
42 Pages Posted: 24 Jan 2017 Last revised: 3 Jul 2023
Date Written: May 14, 2023
Abstract
Modern assembly projects usually involve many interrelated tasks outsourced to suppliers/contractors, and the project outcome depends on all contractors' minimum output. To avoid project failure, the original equipment manufacturer (OEM) often uses a risk-sharing contract, under which the payment to the contractors depends on the minimum output. However, under the risk-sharing contract, contractors may fail to achieve the Pareto optimality because they may select the least efficient secure equilibrium due to strategic uncertainty. To mitigate this coordination failure, we introduce a new information-feedback mechanism that involves informing contractors about the progress made by other contractors in multiple feedback periods. We fully characterize contractors' subgame-perfect secure equilibrium strategies under the feedback mechanism and identify the minimum feedback periods to achieve the Pareto optimality. We further show that this number increases with the number of contractors. We finally test the mechanism in the laboratory with human subjects and find qualitative support for the model. Our study delivers three main messages. Firstly, contractors may fail to coordinate. Secondly, the OEM should require periodic feedback among contractors throughout the project to mitigate coordination failure. Thirdly, in order to address the growing challenge of coordinating multiple contractors, the OEM should offer additional feedback periods and encourage contractors to take prompt action during earlier periods.
Keywords: Behavioral Operations Management, Equilibrium Selection, Coordination, Information Feedback, Non-Cooperative Game Theory
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