Zhihua Chen

Bio: Zhihua Chen is an academic researcher from College of Management and Economics. The author has contributed to research in topics: Information asymmetry & Principal–agent problem. The author has an hindex of 3, co-authored 5 publications receiving 41 citations. Previous affiliations of Zhihua Chen include Tianjin University.

Impacts of risk attitude and outside option on compensation contracts under different information structures

Abstract: We consider an agency problem where a firm (she) hires a manager (he) who has related managerial expertise to implement a new project. The manager’s managerial expertise is his private information and characterized as an uncertain variable. The revenue brought about by the project in the future is also assumed to be uncertain. In light of these challenges, this paper investigates the impacts of the manager’s risk attitude and the type-and-effort dependent outside option on the optimal compensation contracts under different information structures. Through developing the manager’s decision criterion based on his risk attitude instead of the expected-utility-maximization criterion, we find that, if the manager is conservative and the outside option’s revenue uncertainty is sufficiently high, the optimal commission rate will be distorted upwards under asymmetric managerial expertise information compared with that under symmetric managerial expertise information. Our analysis also confirms that the existence of a type-and-effort dependent outside option distorts up the compensation structure tailored at a fixed outside option. We further show that, comparing with the setting of a fixed outside option when the manager is aggressive, the presence of a type-and-effort dependent outside option results in a surprising phenomenon that the manager’s private information makes no distortion of the firm’s profit.

The impacts of private risk aversion magnitude and moral hazard in R&D project under uncertain environment

Abstract: The R&D project manager tends to misreport risk aversion magnitude and shirk under uncertain environment for acquiring information rent and risk premium, which brings a significant challenge for the firm when designing compensation contracts. We consider an agency problem where a firm employs a manager who has private information about his risk aversion magnitude and unobservable efforts to implement a R&D project through a menu of incentive contracts. Both the subjective assessments about the risk aversion degree and the project variability are characterized as uncertain variables. Within the framework of uncertainty theory and principal-agent theory, we investigate the impacts of information asymmetry on the optimal compensation contracts and the firm’s profits under four information structures. We demonstrate that, counterintuitive as it sounds, the manager’s optimal contract under full information is the same as that under pure adverse selection. Nevertheless, compared to the case under full information, the firm should distort the commission rate upwards under pure moral hazard and dual asymmetric information. We also show that when the manager’s efforts are observable, hidden information about the risk aversion magnitude has no effect on the firm’s profit. However, when unobservable, private risk aversion degree always brings about information rent and induces a loss for the firm’s profit. Finally, our study provides managerial recommendations on mitigating the adverse impacts caused by asymmetric information.

Deadline-based incentive contracts in project management with cost salience

Abstract: The contractor’s procrastinating behavior owing to the psychology of cost salience exposes the project manager to the risk of time delay, which brings a significant challenge in project manager’s incentive contract design. This paper considers that a project manager pays a contractor over a menu of deadline-based incentive contracts to conduct a project which consists of two sequential tasks. The contractor is endowed with private cost salience information and unobservable efforts. The subjective assessments about the cost salience degree and the project variability are characterized as uncertain variables. Within the framework of uncertainty theory and principal-agent theory, we investigate the impacts of the existence of cost salience and information asymmetry on the incentive contract and the project manager’s profit. We confirm that cost salience can impel the project manager to lower both the fixed payment under full information and the penalty/incentive rate under pure moral hazard. Interestingly, we find that moral hazard can weaken the extent of inverse impact caused by the existence of cost salience for the project manager. Our study also shows that, for mitigating the adverse impacts brought by moral hazard, the project manager is more profitable to provide effort incentive when the contractor’s efforts are more productive or the project risk is in a higher level. Finally, other suggestions for mitigating the detrimental impacts brought by adverse selection are provided by numerical experiments.

Quality Management by Warranty Contract Under Dual Asymmetric Information

Abstract: Product failure resulting from sourcing supplier’s defective component has compelled a brand owner to enhance quality management, especially when the supplier has informational advantage. In this article, we examine a brand owner’s problem of screening a certain supplier’s inherent quality level with an attempt to induce supply chain partners’ quality efforts using the warranty contract based on information acquired from inspection technology. A supplier’s inherent quality level is herein determined by the private information held by the supplier and is typically characterized as an uncertain variable. The optimal warranty contracts and the expected profits of the brand owner and the supplier are derived from four different scenarios under the framework of uncertainty theory and principal–agent theory. We find that under the condition of pure double moral hazard or pure adverse selection, the first-best outcomes can be achieved without incurring agency cost under the designed contract. However, double moral hazard combined with adverse selection often leads to underinvestment in quality efforts as the supplier can shirk by misreporting her type. Consequently, we present the menu of warranty contracts to screen the supplier’s private information. Finally, we provide empirical managerial recommendations on mitigating potential adverse impacts caused by information asymmetry, supported with numerical investigations.

Co-opetition effect of promised-delivery-time sensitive demand on air cargo carriers’ big data investment and demand signal sharing decisions

Abstract: We study two competing air cargo carriers’ incentives of cooperation with promised-delivery-time (PDT) sensitive demand, where Carrier 1 may invest in big data and share demand signal with Carrier 2. When the carriers focus on demand competition, Carrier 1’s big data investment may benefit itself and the rival, while Carrier 1 never shares its updated demand signal. When the carriers focus on PDT competition, Carrier 2 does not prefer Carrier 1’s big data investment when the PDT competition is fierce. Interestingly, Carrier 1 may be willing to share its updated demand signal and a “win-win” situation occurs.

Green fresh product cost sharing contracts considering freshness-keeping effort

Abstract: Nowadays, along with increased public demands on the high-quality green fresh product, the downstream retailer has to spend in the packaging and cold chain transportation and the upstream farmer needs to invest more in green fresh products producing. In this paper, we investigate a green fresh product supply chain problem, in which the retailer transports and sells green fresh products to the ultimate consumer while the farmer produces green fresh product through spending a greenness improvement investment and sells green fresh products to the retailer. Since the fresh product is perishable, the retailer needs to make a costly freshness-keeping effort. Obviously, the freshness-keeping effort, the price, and the greenness improvement level will affect the demand. Thus, to demonstrate the game structure between the retailer and the farmer, a decentralized model without cost sharing, a decentralized Stackelberg cost sharing model, and a Nash bargaining model with cost sharing are formulated. Results show that: (1) The equilibrium decisions under Stackelberg model with cost sharing are larger than that of the Nash bargaining model with cost sharing, while equilibrium decisions in the decentralized model without cost sharing are the least. (2) Both greenness improvement levels in Stackelberg cost sharing contract and Nash bargaining are greater than that in decentralized model without cost sharing. (3) The retailer’s profits in Stackelberg cost sharing contract and Nash bargaining are larger than that in decentralized case without cost sharing, while the farmer’s profits in Stackelberg cost sharing contract and Nash bargaining are larger than in decentralized model without cost sharing in certain conditions. Meanwhile, a numerical example is given to illustrate the results we obtained in the theoretical analysis process.

Green investment in a supply chain based on price and quality competition

Abstract: Along with the significant improvement of environmental consciousness, consumers not only consider the price and quality level of products, but also pay more attention to their green level. In order to strengthen the competitive advantage, the manufacturers should consider the green level of products in addition to their price and the quality level. In this paper, we investigate the green investment of two competing manufacturers in a supply chain based on price and quality competition and analyze the effect of green investment on the quality level of the product. The research shows that the manufacturer is willing to make a green investment with a relatively low value of green sensitivity regardless of whether the manufacturer’s rival makes a green investment. Further, we find that the profit of the manufacturer who makes a green investment is greater than the profit of the manufacturer who does not invest regardless of the market size. When both competing manufacturers make green investments, the profit of the manufacturer who is in a large potential market is higher than that of the manufacturer who is in a small potential market. While in a same potential market, the profits of the two competing manufacturers are the same. Finally, we conclude that the green investment counterintuitively will not always improve the quality level of the products.

Endogenous Selection and Moral Hazard in Compensation Contracts

Abstract: The two major paradigms in the theoretical agency literature are moral hazard (i.e., hidden action) and adverse selection (i.e., hidden information). Prior research typically solves these problems in isolation, as opposed to simultaneously incorporating both adverse selection and moral hazard features. We formulate two complementary generalized principal-agent models that incorporate features observed in real world contracting environments (e.g., agents with power utility and limited liability, lognormal stock price distributions, and stock options) as mathematical programs with equilibrium constraints (MPEC). We use state- of-the-art numerical algorithms to solve the resulting models. We find that many of the standard results no longer obtain when wealth effects are present. We also develop a new measure of incentives calculated as the change in the agent's certainty equivalent under the optimal contract for a change in action evaluated at the optimal action. This measure facilitates interpretation of the resulting contracts and allows us to compare contracts across different contracting environments.

A three-echelon supply chain with asymmetric information under uncertainty

Abstract: This paper investigates a three-echelon supply chain problem in which multiple suppliers, a single manufacturer and a single retailer are participants. The manufacturer selects suppliers and estimates quantity of defective components purchased from the suppliers, but the quality information is unavailable for the manufacture due to asymmetric information. In addition, customers’ demands could not be predicated accurately either. Under this circumstance, quantity of defective components and demands of customers are all characterized as uncertain variables according to real trade. Based on uncertainty theory, three models under different criteria such as expected value criterion, chance-constrained one and measure-chance one are constructed for the problem and corresponding solution approach is proposed as well under uncertain environment. Finally, some numerical examples are given to show the applications of the problem.