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Keywords:

  • supply risk;
  • information asymmetry;
  • signaling game;
  • information sharing;
  • random yield;
  • export processing

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, and ex post information sharing—a significant departure from the literature. The optimal disclosure strategy is driven by the trade-off between the gains from Pareto efficiency improvement and self-interested overproduction. 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. This strategic interaction is further exacerbated by the double marginalization effect from 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 information suppressive effect and overinvestment incentive 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.