Information Acquisition and Voluntary Disclosure in an Export-Processing System
Long Gao, Zhaolin Li, Biying Shou
Production and Operations Management · 2014 · Volume 23 · Issue 5
Abstract
We study a strategic information management problem in the export-processing trade, where the buyer controls the raw material input and sales and the producer is responsible for production. The production is vulnerable to random yield risk. The producer can exert a costly effort to acquire the private yield rate information and discretionarily share it with the buyer. We develop a sequential Bayesian game model that captures three key features of the system—endogenous information endowment, voluntary disclosure, andex postinformation sharing—a significant departure from the literature. The optimal disclosure strategy is driven by the trade-off between the gains from Paretoefficiency improvementand self-interestedoverproduction. It is specified by two thresholds on yield rate: only the middle-yield producers (with yield rate between these two thresholds) share private information to improve supply-demand match; the low- and high-yield producers withhold information to extract excess input from the buyer. The buyer in response penalizes nondisclosure with reduced input and rewards information sharing with a larger order. Thisstrategic interactionis further exacerbated by thedouble marginalization effectfrom decentralization, resulting in severe efficiency loss. We examine the effectiveness of three corrective mechanisms—vertical integration, mandatory disclosure, and production restriction—and reveal the costs of informationsuppressive effectandoverinvestmentincentive and the benefit from concessions on the processing fee. Our study endogenizes the asymmetric supply risk and provides the first attempt to rationalize the strategic interactions of informational and operational incentives in the export-processing system.
Keywords
supply risk, information asymmetry, signaling game, information sharing, random yield, export processing
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