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Supply chain coordination with information sharing in the presence of trust and trustworthiness

The strategic use of private information can cause efficiency losses in traditional principal–agent settings, which are found, for example, in supply chain interactions. One stream of research states that these efficiency losses cannot be overcome if all agents use their private information strategically. However, another stream of research highlights the importance of communication, trust, and trustworthiness in supply chain management. In many instances, supplier–buyer relationships are found to reflect a principal–agent context where the supplier acts as the principal and the buyer behaves as the agent. Typically, here it is assumed that the supplier has an a priori distribution assumption over the buyer's private information on cost positions or market conditions. However, little is said on how the principal obtains this distribution. Moreover, it is stressed that the assessment of the a priori distribution is not influenced by communication because of the strategic extent of information sharing. The underlying concept behind this study is that there are two types of buyers (agents). The first type always reports her private information truthfully while the second type does not. In this framework, the supplier (principal) adjusts his a priori distribution conditioned on the buyer's shared information and generates the menu of contracts with respect to the adjusted probabilities. The presented model highlights that the impact of communication on the supplier's, buyer's, and supply chain's performance level is ambiguous and mainly depends on the buyer's information-sharing behavior as well as the relative extent of trust and trustworthiness. This study gives valuable insights into which situations communication is likely to harm the overall supply chain performance, thereby increasing the awareness that the ever increasing claims for trust and information sharing in supply chain management have to be handled carefully.