Incentivizing by example and money

Leaders are role models that affect their employees’ efforts. The effect depends on how much an employee identifies with the “boss”. Since this degree of identification is private information of the employee, additional financial incentives must be provided. Therefore, we study a principal-agent problem in which the principal affects the agent’s effort by her own effort and by financial incentives. The resulting principal-agent problem has a few non-standard specifics such as: (i) bilateral externalities as the principal’s effort affects the agent and vice versa and (ii) endogenous reservation utility of the agent. Combined, this leads to non-trivial and interesting contracts.

Supply Chain Decisions Considering Heterogeneous Consumer Greenness Preference and Reservation Utilities

This article focuses on how the prices set by supply chains and the product greenness level changes when there exists a difference for consumers in both their greenness preference and their reservation utility for the common product with minimal greenness, based on a two-dimensional model which is built and the market is partitioned into four groups. In this study, the authors use the Stackelberg game model to analyze the decisions of a two-stage supply chain, providing environmentally friendly products affected by a consumer greenness preference which is represented by the willingness-to-pay (WTP) for product greenness. The authors found that manufacturers may lower the product greenness level with the decrease of the valuation of consumer's WTP for product greenness, but he may prefer keeping the same product greenness, he will even improve it, when there is a reduction in reservation utility for the traditional product. Moreover, this article shows that there is different impact for different combinations of both WTP for product greenness and product greenness level (different market segmentations) on price decisions of the manufacturer and retailer. In consideration of the asymmetric information about consumer's utility and willingness to pay between manufacturer and retailer, the authors introduce the bargaining power into the study, and then they conclude that during the different market segmentations, the wholesale price and retail price go down as a retailer strengthens his bargaining power, and increasing sales volume can improve profit to make up for a loss in retail price.

Managing operations in customer-intensive services with forward-looking customers

Purpose This paper aims to investigate the optimal price and service rate decisions in a customer-intensive service, where customers’ perceived service quality decreases in the service speed. Customers are assumed to be forward-looking in purchase decision-making and heterogeneous in their reservation utilities. The purpose of this paper is to study the impact of customers’ forward-looking behavior and the heterogeneity on the operational decisions in a customer-intensive context. Design/methodology/approach The service is delivered through an M/M/1 queue system with unobservable queues. Customers are forward-looking in queue joining decisions, where the purchase decisions are made when the expected utility is greater than the reservation utility. The optimal price and service rate decisions are analyzed with both homogeneous and heterogeneous customers, where homogenous customers have the same reservation utility in purchase decision-making, while heterogeneous customers have different reservation utilities, which are captured by a random variable. Findings The optimal price and service rate decisions with forward-looking customers depend on the customer intensity, potential market size and customers’ reservation utility distribution. The results suggest that customers’ heterogeneity in terms of their reservation utilities affects the optimal decisions, market coverage and the expected revenue. Service providers need to take customers’ heterogeneity and the forward-looking behavior into operational decision-making. Originality/value This paper extends previous studies in customer-intensive service and contribute to the service operations management area by explicitly incorporating customers’ forward-looking behavior and heterogeneity in purchase decision-making. Assuming customers are forward-looking and heterogeneous is more realistic and practical. The results highlight that knowing customers’ behavioral characteristics can better improve decision-making in service operations, which is critical for enhancing customers’ satisfaction and loyalty, thus critical to a firm’s success in the market with intensive competition.

Search and Satisficing

Many everyday decisions are made without full examination of all available options, and, as a result, the best available option may be missed. We develop a search-theoretic choice experiment to study the impact of incomplete consideration on the quality of choices. We find that many decisions can be understood using the satisficing model of Herbert Simon (1955): most subjects search sequentially, stopping when a “satisficing” level of reservation utility is realized. We find that reservation utilities and search order respond systematically to changes in the decision making environment. (JEL D03, D12, D83)

Competitive Analysis of Multi-Attribute On-Line Auction

The emergence of auction that supports bids characterized by several attributes is one of the most recent evolutions within auction theory. The purpose of this paper is to introduce multi-attribute into the on-line auction mechanism, proposed by Lavi and Nisan. Our mechanism is designed for auctioning multiple units of a good when the bidders arrive and depart dynamically. To incorporate the buyer’s preferences across attributes in an auction setting, we adopt a novel application of a scoring function. Furthermore, we describe a competitive reservation utility strategy (RUS), which helps the buyer decide when and how many goods he should buy. Finally, we also perform numerical examples showing our results.

Geeksploitation: Optimism and Monitoring-Aversion in Agency Relationships

ABSTRACT: This paper addresses the contracting implications of New Economy firms: informal, flexible organizations predominantly staffed by younger workers. The model incorporates two findings from the behavioral economics literature. First, workers may overestimate their own productivity (optimism). Second, workers may be monitoring-averse, with intense monitoring undermining intrinsic motivation. The combination of behavioral traits and work setting has deleterious consequences for workers. Despite higher monetary compensation and sometimes weaker incentives, they work harder in equilibrium, experience a higher disutility of effort than conventional workers, and also have a utility realization that is lower on average than their reservation utility. Optimism and monitoring-aversion are mutually reinforcing. When private information is introduced, both high- and low-productivity unconventional workers benefit, in contrast to standard agency models with asymmetric information. Both types of agents still experience a utility shortfall, however.