2020-12-30 | Fang Liu： An Index-based Dynamic Mechanism
We consider a retailer sources from an economically weaker supplier for a high-quality key material. The production of the material needs to comply with social and environmental standards over time. However, such compliance is costly, and the cost varies with privately observed dynamically changing environment (termed as the state), so the supplier may cut corners, risking losing the ability to supply in the future. While retailer can invest to reduce the compliance cost, the investment outcome is uncertain. Therefore, each party faces a trade-off between short-term gains/losses and long-term losses/gains. We present a dynamic model to capture these complexities and explore incentive mechanisms that enable all parties collaborate to achieve sustainable quality supply. We propose a sustainability index that reflects the supplier's compliance status, and then construct a dynamic mechanism to achieve the first-best index in each period. The payments to the supplier reflect both current and future states. This mechanism allows both parties' voluntary participation and induces truthful information exchange, self-enforcement, as well as first-best retailer investments. We show that the retailer implements the mechanism and invests in the supplier only if the collaboration is longer than a certain contract length. Thus, we uncover situations where the support from the non-for-profit organizations is particularly valuable.
Fang Liu is currently a visiting professor at Chinese Academy of Sciences. She received her PhD in Operations Management from Fuqua School of Business, Duke University. Her primary research interests are in humanitarian operations, mechanism design, and sustainable operations. She is currently working on multiple projects, including verious allocations problems with applications in humanitarian operatisons and e-commerce. Her paper has appeared in Operations Research, Manufacturing and Service Operaions Management and Production and Operations Management. She is a reviewer for many top journals such as Operations Research, Math of OR, MSOM, and POMS.