Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches
The legal literature distinguishes between the liquidated damage and the penalty clauses in contracts, and holds that penalties designed for the prevention of breach are excessive compared to the liquidated damages. In an efficient supply chain contract, the penalty must satisfy the participation an...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Pompea College of Business
2022-11-01
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| Series: | American Business Review |
| Subjects: | |
| Online Access: | https://digitalcommons.newhaven.edu/americanbusinessreview/vol25/iss2/3/ |
| _version_ | 1797984152509743104 |
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| author | Arijit Mitra Sumit Sarkar |
| author_facet | Arijit Mitra Sumit Sarkar |
| author_sort | Arijit Mitra |
| collection | DOAJ |
| description | The legal literature distinguishes between the liquidated damage and the penalty clauses in contracts, and holds that penalties designed for the prevention of breach are excessive compared to the liquidated damages. In an efficient supply chain contract, the penalty must satisfy the participation and incentive compatibility constraints of the signatories. Considering loss-averse players, we have calculated optimal penalties in a supply chain contract and compared those with the liquidated damages. Two possible breaches are considered – a breach in quality of the delivery and a breach in the process. In the absence of any penalty, a process breach reduces the supplier’s delivery risk and cost of delivery. Determining the parametric conditions for efficient contracts, numerically we show the effects of various variables on the zone of efficient contract. We show that the optimal penalties need not be excessive compared to the liquidated damages. |
| first_indexed | 2024-04-11T06:57:03Z |
| format | Article |
| id | doaj.art-a94175733da1424d900810d975c45f5d |
| institution | Directory Open Access Journal |
| issn | 0743-2348 2689-8810 |
| language | English |
| last_indexed | 2024-04-11T06:57:03Z |
| publishDate | 2022-11-01 |
| publisher | Pompea College of Business |
| record_format | Article |
| series | American Business Review |
| spelling | doaj.art-a94175733da1424d900810d975c45f5d2022-12-22T04:38:59ZengPompea College of BusinessAmerican Business Review0743-23482689-88102022-11-0125227029210.37625/abr.25.2.270-292Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible BreachesArijit Mitra0Sumit Sarkar1Xavier Institute of Management Bhubaneswar (XIMB)XLRI-Xavier School of ManagementThe legal literature distinguishes between the liquidated damage and the penalty clauses in contracts, and holds that penalties designed for the prevention of breach are excessive compared to the liquidated damages. In an efficient supply chain contract, the penalty must satisfy the participation and incentive compatibility constraints of the signatories. Considering loss-averse players, we have calculated optimal penalties in a supply chain contract and compared those with the liquidated damages. Two possible breaches are considered – a breach in quality of the delivery and a breach in the process. In the absence of any penalty, a process breach reduces the supplier’s delivery risk and cost of delivery. Determining the parametric conditions for efficient contracts, numerically we show the effects of various variables on the zone of efficient contract. We show that the optimal penalties need not be excessive compared to the liquidated damages.https://digitalcommons.newhaven.edu/americanbusinessreview/vol25/iss2/3/contractliquidated damageloss-aversionpenaltysupply chain |
| spellingShingle | Arijit Mitra Sumit Sarkar Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches American Business Review contract liquidated damage loss-aversion penalty supply chain |
| title | Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches |
| title_full | Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches |
| title_fullStr | Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches |
| title_full_unstemmed | Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches |
| title_short | Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches |
| title_sort | efficient supply chain contracting with loss averse players in presence of multiple plausible breaches |
| topic | contract liquidated damage loss-aversion penalty supply chain |
| url | https://digitalcommons.newhaven.edu/americanbusinessreview/vol25/iss2/3/ |
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