Seminar (Dept. of Management Science and Engineering)

Title: Optimal Contract Design under Multiple Moral Hazard - Ex Ante, Ex Post Cash Diversion, and Price Deviation

Speaker: Mingliu Chen (The University of Texas at Dallas)

Time: 10:00 (Wednesday), December 27th, 2023

Venue: Room 706, Mingde Business Building

Language: Chinese/English

ABSTRACT:

We analyze a decentralized newsvendor production problem subject to agency issues. A principal provides funds and contracts with an agent for capacity planning. However, the agent is subject to moral hazard, such as cash diversion during production, which is unobservable to the principal. We derive the principal's optimal contract under ex ante and ex post cash diversion scenarios, which happen before and after demand is realized, respectively. Optimal contracts have simple forms and are easy to implement. Furthermore, we provide the optimal production quantity and pricing decisions. When only subjected to ex ante diversion, the optimal contract is a debt contract, which leads to underproduction and a higher price than first-best centralized production. When subjected to both ex ante and ex post diversion, the debt contract is no longer optimal. Instead, we present a modified debt repayment that resembles both debt and revenue-sharing contracts is optimal. Furthermore, we find that the optimal capacity and price depend on the level of ex post diversion efficiency with respect to which the optimal price is nonmonotonic. Finally, we consider a scenario where the actual sales price is also unobservable and find that the principal can still use a simple debt contract to deter ex ante diversion and price deviation in most regimes. However, this debt contract must have an additional clause penalizing excessive revenue.

SHORT BIOGRAPHY:

Mingliu Chen is an Assistant Professor in Operations Management at Jindal School of Management, the University of Texas at Dallas. He is interested in applying analytical and modeling techniques in market and mechanism design issues. He has contributed to the literature on contract designs and developed novel models describing problems in the sharing economy and online matching platforms. Recently, his research focused on design problems in some emerging markets and the interface between finance and operations.