Relative performance evaluation and contract externalities

We consider the incentive characteristics of optimal linear contracts based on relative performance evaluation (RPE) for managers under moral hazard in imperfectly competitive product markets. Each contract influences the quantity choices of all competing agents causing contract externalities that affect the principals’ contracting game. We analyze the relations between the optimal extent of RPE and several firm and market characteristics, allowing for heterogeneous firms and idiosyncratic firm risk. In general, we find non-monotonic comparative static results regarding the influence of market and firm-specific risk, the industry’s competitiveness, and the correlation of the firms’ profit.     

Scoring rules and the evaluation of probabilities

Summary In Bayesian inference and decision analysis, inferences and predictions are inherently probabilistic in nature. Scoring rules, which involve the computation of a score based on probability forecasts and what actually occurs, can be used to evaluate probabilities and to provide appropriate incentives for “good” probabilities. This paper review scoring rules and some related measures for evaluating probabilities, including decompositions of scoring rules and attributes of “goodness” of probabilites, comparability of scores, and the design of scoring rules for specific inferential and decision-making problems Read before the Spanish Statistical Society at a meeting organized by the Universitat de València on Tuesday, April 23, 1996     

Credit guarantee mechanism with information asymmetry: a single sourcing model

This study concerns small and medium-sized enterprise (SME) suppliers suffering from cash constraints in operations, money shortages with possible disruptions and cost uncertainty because of the distributor’s supply risk and the information asymmetry. Thus, this study adopts the distributor’s (buyer’s) perspective and applies a credit guarantee mechanism with an incentive contract as a risk management tool. The distributor can adopt incentive contracts to reveal the type of its supplier; the higher the inefficient supplier’s contribution to the distributor, the smaller the gap between procurement contract quantities with the efficient supplier and procurement contract quantities with the inefficient supplier. An insight into practice is that incentive contracts are tools for acquiring ideal suppliers in the supply base and help companies such as Li & Fung enhance their competitive capabilities.     

Examining supply contracts under cost and demand uncertainties from supplier’s perspective: a real options approach

Supply contracts have been widely utilised by practitioners to mitigate supply chain risks and disruptions while maintaining flexibility and stability. It is, thus, not surprising that buyers’ economically rational decisions towards supply contracts have been well studied. Missing in the literature, however, is examination of potential values and risks of supply contracts from supplier’s perspective. Motivated by this literature vacancy, this paper, using a real options approach, investigates a supplier’s acceptance decision towards a supply contract with variable cost and supply demand uncertainties. Through analytical and numerical examinations, conditions under which it is economically viable for the supplier to accept the supply contract are derived. This study also uncovers the impacts of variable cost and supply demand uncertainties as well as contract duration on the supplier’s acceptance decision. Also, there exists a range of contract duration beyond which the supplier should reject the supply contract offered by the client. To facilitate the understanding of this duration range, the corresponding shortest and longest contract duration is derived through numerical examples.     

An expert system using priorities for solving multiple-criteria facility layout problems

In this paper we develop an expert system for multiple-criteria facility layout problems. The facility layout problem is identified as an ill-structured problem; our approach for solving it is based on expert systems and multiple-criteria decision making (MCDM). The expert system interacts with the decision maker (DM), and reflects the DM's preferences in the selection of rules and priorities. The inference engine is a forward-chaining reasoning procedure which is discussed in detail. The approach consists of two parts: (a) construction of a layout based on a set of rules and restrictions, and (b) improvement of the layout based on interaction with decision maker. The MCDM expert system approach considers and incorporates the multiple criteria in these two parts as follows. In (a) it uses priorities on the selection of rules, adjacency of departments, and departments for construction purposes. In (b) it uses different objectives such as materials handling cost, flexibility, and materials handling time for paired comparison of generated layouts for improvement purposes. Some experiments with the developed computer package are reported and an example is solved.     

Optimal preventive maintenance strategy for leased equipment under successive usage-based contracts

In the context of equipment leasing, maintenance service is usually bundled with the leased equipment and offered by the lessor as an integrated package under a lease contract. The lessor is then responsible to prescribe an effective maintenance policy to keep the equipment operational in an economical way. This paper investigates upgrade and preventive maintenance (PM) strategies for industrial equipment during successive usage-based lease contracts with consideration of a warranty period, from the lessor's perspective. The accelerated failure time model and age reduction model are adopted to capture the effect of usage rate and imperfect PM/upgrade on the equipment reliability, respectively. More importantly, since equipment usage rates may vary across different lease contracts, this study develops an age correspondence framework to characterise usage rate shifts between successive lease periods. The optimal upgrade degree and the optimal number and level of PM actions are progressively updated for each upcoming lease period to minimise the total expected lease servicing cost, by considering the usage rate and maintenance implementation history. Numerical studies show that under given cost structures, periodical PM activities within each lease period tends to outperform the pre-leasing upgrade actions, though both of them can reduce the lease servicing cost.     

The analytic form of Green’s function in elliptic coordinates

The purpose of this study is the derivation of a closed-form formula for Green’s function in elliptic coordinates that could be used for achieving an analytic solution for the second-order diffraction problem by elliptical cylinders subjected to monochromatic incident waves. In fact, Green’s function represents the solution of the so-called locked wave component of the second-order velocity potential. The mathematical analysis starts with a proper analytic formulation of the second-order diffraction potential that results in the inhomogeneous Helmholtz equation. The associated boundary-value problem is treated by applying Green’s theorem to obtain a closed-form solution for Green’s function. Green’s function is initially expressed in polar coordinates while its final elliptic form is produced through the proper employment of addition theorems.     

Opportunism is not the only reason why firms exist: why an explanatory emphasis on opportunism may mislead management strategy

The object of the present essay is neither to overturn transactioncost economics nor to deny the reality of opportunism. Instead,it is to question the explanatory role of the concept of opportunismin the transaction cost analysis of Oliver Williamson and hisfollowers. Williamson has suggested that potential or actualopportunism emerges as the source of the ‘transactioncosts’ involved in monitoring and enforcing contracts.On the contrary, it is shown here that there are several additionaland likely sources of contract default or incomplete performance.Williamson's explanatory concentration on opportunism thus misidentifiesthe reasons for different hierarchical governance structuresin the real world. As these additional sources are ignored,the emphasis on opportunism can impair a true understandingof the inner workings of the firm, and be a misleading guidefor practical questions of organizational design and corporatestrategy.     

Contract negotiation and risk preferences in dual-channel supply chain coordination

This study employs profit-sharing contracts to coordinate dual-channel supply chains and examines the selection of profit-sharing parameters and the allocation of extra system profit gained from coordination. We characterise the Pareto-optimal contracts for the two- and three-stage dual-channel supply chains, by developing and maximising system utility function related to risk preferences and negotiating power. Under the optimal profit-sharing parameter in a two-stage supply chain, both members are reluctant to cooperate; however, in a three-stage supply chain, under the optimal two profit-sharing parameters selected by optimising the system utility function, the retailer is always reluctant to cooperate, but the distributor or the supplier may have incentives to deviate from cooperation. In this case, the distributor and the supplier will negotiate again as in a two-stage supply chain so that all three members can benefit from coordination with profit-sharing contracts. Besides acting independently, the distributor, in the process of contract negotiation, may choose to form an alliance with the upstream supplier or the downstream retailer, which means the relationship among the three members involving profit allocation after coordination is quite different from that for a two-stage supply chain and is not necessarily interest-contrary. In the contract negotiation, in any kind of scenario, risk aversion and negotiation power have a significant impact on the selection of optimal profit-sharing parameters and the allocation of extra system profit. One member’s risk aversion or its negotiation power may be advantageous to the other. Mathematical examples are illustrated to clarify the contract negotiation process.     

Evaluation of the contract reliability for alternative infrastructure project delivery: a contract engineering method

Governments at all levels are increasingly motivating the private sector to participate in infrastructure development using alternative project delivery methods to relieve financial burden. When designing contracts, governments usually offer incentives while requiring cost or time guarantee to balance project attractiveness to the private sector and fair protection of public interest. However, a practical and critical problem is how to properly design these provisions. Although previous studies have investigated the value of these provisions, a knowledge gap still exists with respect to methods of fairly and effectively designing such provisions. This study fills this gap by developing a methodology that analyzes the appropriateness of guarantee or warranty provisions for contracts. In this study, a contract reliability index is constructed, and a process of evaluating contract reliability is proposed. The New Mexico Highway 44 project, in which three warranty provision arrangements are investigated, is used as a case study to illustrate the analysis process. Results show that although a ceiling clause can effectively motivate the private sector to participate in the project, it sacrifices a significant amount of public benefits. By contrast, although a warranty option can protect public benefits, it cannot effectively incentivize the private sector. A combination of the ceiling clause and the warranty option will therefore result in improved contract provision design. The proposed methodology in this study is especially useful for governments in properly determining contract clauses in infrastructure development.     

Controlling a supplier’s subcontracting decisions through contractual enforcement or economic incentives

Suppliers often subcontract part of their workload to other suppliers, and manufacturers might suffer severe consequences if they do not anticipate their suppliers’ incentives to subcontract. In this paper, we study the case where a manufacturer outsources two tasks to a top-tier supplier. The manufacturer must decide whether it should design a contract that enforces that the different tasks are completed by the appropriate suppliers, and when it is preferable to use economic incentives to manipulate the top-tier supplier’s subcontracting behaviour. We find that when the cost difference between suppliers of different tiers is small and the correlation between the risks associated with the two tasks is minimal, the manufacturer can benefit from designing a contract that ensures the preferred subcontracting behaviour, if the cost of enforcing such a contract is not too high. However, when such enforcement cost is substantial, the manufacturer might be better off manipulating the top-tier supplier’s economic incentives.     

Optimal service parts contract with multiple response times and on-site spare parts

This study examines user outsourcing of spare parts management to vendors through a service contract. The user’s selection of a fixed-price service parts contract is formulated as a stochastic integer programming model that decides multiple response times and on-site spare parts, while considering component breakdown with uncertain failure rates. We analytically derive the optimality conditions for the continuous case and subsequently design an efficient algorithm. Numerical illustrations and analyses are conducted to evaluate decisions under various scenarios. Our analysis shows that when both failure rate and expedited contract cost are high, coupled with low part cost, users would prefer the purchase of spare parts for all components to expedited contracts. A fixed-price expedited contract has a lower marginal cost with respect to failure rate than a fixed-price next day contract and a usage-based contract. We also examine inventory behaviour for a single part, multiple types of parts, and multiple groups of parts. It is shown that there is a cost-saving pooling effect in spare parts for identical items, which significantly raises the likelihood of having on-site stored parts. The problem becomes more complex for multiple items, reflecting bundling effects between items for a given contract.     

Error regulation in a string of high-speed vehicles

This paper deals with the theoretical aspects of the design of an optimal linear feedback system for regulating the position and velocity of each vehicle in a dense string of vehicles moving at high speed. A cost functional is formulated and the Pontryagin optimal principle, which is an alternate to Kapur’s method, is used for the optimization problem. The results obtained show that by a proper choice of the cost functional, a carfollowingsystem which meets some specified objectives, in terms of the desired headway and the desired velocity, can be designed.     

A Review of Smart Contract Blockchain Based on Multi-Criteria Analysis: Challenges and Motivations

A smart contract is a digital program of transaction protocol (rules of contract) based on the consensus architecture of blockchain. Smart contracts with Blockchain are modern technologies that have gained enormous attention in scientific and practical applications. A smart contract is the central aspect of a blockchain that facilitates blockchain as a platform outside the cryptocurrency spectrum. The development of blockchain technology, with a focus on smart contracts, has advanced significantly in recent years. However, research on the smart contract idea has weaknesses in the implementation sectors based on a decentralized network that shares an identical state. This paper extensively reviews smart contracts based on multi-criteria analysis, challenges and motivations. Therefore, implementing blockchain in multi-criteria research is required to increase the efficiency of interaction between users via supporting information exchange with high trust. Implementing blockchain in the multi-criteria analysis is necessary to increase the efficiency of interaction between users via supporting information exchange and with high confidence, detecting malfunctioning, helping users with performance issues, reaching a consensus, deploying distributed solutions and allocating plans, tasks and joint missions. The smart contract with decision-making performance, planning and execution improves the implementation based on efficiency, sustainability and management. Furthermore, the uncertainty and supply chain performance lead to improved users’ confidence in offering new solutions in exchange for problems in smart contacts. Evaluation includes code analysis and performance, while development performance can be under development.     

What is measured in qualimetry?

The product quality concept is considered. Expressions are given for the manufacturer’s and customer’s decision functions. Definitions of the quality concept are examined. It is shown that numerical expert evaluations express not the amount of quality but instead the preference relation for product quality for a given specification. __________ Translated from Izmeritel’naya Tekhnika, No. 3, pp. 25–29, March, 2006.     

Channel coordination for multi-stage supply chains with revenue-sharing contracts under budget constraints

Real-life situations show that revenue-sharing (RS) contracts used in multi-stage supply chains have more complex structures than those that have been studied in recent research. In this paper, we study RS contracts in multi-stage supply chains where some members work with more than one upstream member. This general supply chain structure closely resembles those in actual practice under RS contracts. The literature on supply chain contracts has not adequately addressed contract design for supply chains with members who face budget constraints. We show that the RS contract could fail to coordinate supply chains when members are under particular budget constraints. In response, we propose a revenue-sharing with budget constraints (RSB) contract that adds no administrative cost. A properly designed RSB contract can be used to achieve supply chain coordination and to arbitrarily allocate profits in multi-stage supply chains. Our numerical results provide insights into ways supply chain coordination can be achieved under budget constraints through the RSB contract.     

Understanding the emergence of 'open science' institutions: functionalist economics in historical context

This essay exposes the limitations of the ‘logical origins’approach that has found favour among economists who seek tounderstand the workings of institutions in the past present.It pursues a different approach, applying functionalism in historicalcontext to explain the emergence of the characteristic ethosand institutions of ‘open science’. The emergenceduring the late sixteenth and early seventeenth centuries ofthe idea and practice of ‘open science’ representeda break from the previously dominant ethos of secrecy in thepursuit of ‘Nature’s secrets’. It was a distinctiveand vital organizational aspect of the scientific revolution,from which crystallized a new set of norms, incentives and organizationalstructures that reinforced scientific researchers’ commitmentsto rapid disclosure of new knowledge. To understand how thiscame about, it is necessary to examine the economics of patronageand the roles of asymmetric information and reputation in theearly modern reorganization of scientific activities. The riseof ‘cooperative rivalries’ in the revelation ofnew knowledge is seen as a functional response to heightenedasymmetric information problems posed for the Renaissance systemof court patronage of the arts and sciences; pre-existing informationalasymmetries had been exacerbated by increased importance ofmathematics and the greater reliance upon sophisticated mathematicaltechniques in a variety of practical contexts of application.Analysis of the court patronage system of late Renaissance Europe,within which the new natural philosophers found their support,points to the significance of the feudal legacy of fragmentedpolitical authority in creating conditions of ‘commonagency contracting in substitutes’. These conditions areshown to have been conducive to more favorable contract terms(especially with regard to autonomy and financial support) forthe agent–client members of western Europe’s nascentscientific communities. Some lessons may be drawn for contemporary scienceand technology policy debates, in which the open science modeof pursuing knowledge often seems to be viewed a robust concomitantof the power of scientific research techniques—whereasit is a fragile cultural legacy of western Europe’s history,upon which rests the ascendancy of modern science as a driverof long-term economic growth.     

Failure modeling and optimizing preventive maintenance strategy during two-dimensional extended warranty contracts

Offering extended warranty (EW) contracts for products such as automobiles is a good source of revenue for manufactures, insurers and third party companies. However, difficulties in the modeling of product’s failure process and assessing corrective and preventive maintenance actions’ effects on the reliability of product enforce the service providers to propose limited EW contracts with simple “minimal repair at failures” servicing strategy. In this paper for a product sold with a two-dimensional warranty, we model the failure process of product, the effect of imperfect preventive maintenance (PM) and corresponding servicing cost in terms of product’s age and usage. Then, we propose a mathematical optimization model to derive optimal number and degrees of preventive repairs to minimize the EW provider’s servicing cost. We also provide some guidelines to help the EW provider to design flexible EW contracts and determine their corresponding optimal maintenance strategies. To reproduce an illustrative numerical example, we use the failure history of a commercial vehicle produced in a plant in Iran. The provided results reveal that considering proper preventive maintenance strategy during the EW period may effectively reduces the cost of EW servicing.     

Supply chain models with corporate social responsibility

Currently, corporate social responsibility (CSR) has become a critical issue because more than 88% of consumers think companies should try to achieve their business goals while improving society and the environment. This paper focuses on a CSR supply chain where an Original Equipment Manufacturer’s (OEM’s) sales can be significantly reduced because of its oversea supplier’s social misconduct. Specifically, as in a conventional wholesale price contract the supplier determines its wholesale price and the OEM decides its order quantity, but in a CSR supply chain, the supplier can autonomously change its CSR cost once a minimum requirement is satisfied. A higher CSR cost means that the supplier invests more in its corporate social responsibility and the OEM’s sales will be less likely to be influenced by negative CSR events. The equilibrium solutions show an important dilemma – although the supplier’s profit increases in the basic CSR requirement, the supplier will always use the minimum CSR cost under the conventional wholesale price contract, which eventually leads to a low supply chain profit. Thus, we introduce two different contracts to handle this problem: the flexible quantity contract and the wholesale price incentive contract, which are, respectively, a ‘tough’ way and a ‘beneficent’ way for the OEM to solve the problem. Although the two ways cannot (always) coordinate the supply chain, we show that they both will significantly improve the supply chain performance. Our results also show that in some conditions, one strategy will dominate, whereas in different conditions the other strategy dominates.     

An evaluation scheme for assessing the worth of automatically generated design alternatives

This paper introduces a tool called the designer preference modeler (DPM) that analyzes the designer’s decision making during concept evaluation, and constructs a designer preference model to be used for evaluation of automatically generated design alternatives. The method is based on establishing an interaction between a designer and a computational synthesis tool during conceptual design. The synthesis software generates design alternatives using a catalog of design knowledge formulated as grammar rules which describe how electromechanical designs are built. DPM carefully selects a set from these alternatives and presents it to the designer for evaluation. The designer’s evaluations are translated into a preference model that is subsequently used to search the solution space for best designs. Application of the method to the design of a consumer product shows DPM’s range of capabilities.