THESIS
2020
xi, 86 pages : illustrations ; 30 cm
Abstract
This thesis investigates the hidden rebate issue in a procurement supply chain with intermediation.
The first part develops direct mechanism for the retailer to reveal the intermediary’s
private information to reduce the incidence of hidden rebate as well as to reduce the allocation
inefficiency. The second part analyzes supplier’s strategic incentive to offer a bribe (i.e., rebate).
In the first part, in order to circumvent the issue of hidden rebates and quote inflations,
we develop a deterministic incentive-compatible mechanism that is based on a simple selection
rule (for selecting a manufacturer) and a contingent service fee (as a reward for the service
provided by the PSP). Our optimal mechanism creates incentives to: (1) deter the PSP from
inflating the quote submitted f...[
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This thesis investigates the hidden rebate issue in a procurement supply chain with intermediation.
The first part develops direct mechanism for the retailer to reveal the intermediary’s
private information to reduce the incidence of hidden rebate as well as to reduce the allocation
inefficiency. The second part analyzes supplier’s strategic incentive to offer a bribe (i.e., rebate).
In the first part, in order to circumvent the issue of hidden rebates and quote inflations,
we develop a deterministic incentive-compatible mechanism that is based on a simple selection
rule (for selecting a manufacturer) and a contingent service fee (as a reward for the service
provided by the PSP). Our optimal mechanism creates incentives to: (1) deter the PSP from
inflating the quote submitted from the ethical manufacturer; (2) reduce the incidence of hidden
rebates; and (3) reduce the retailer’s procurement cost and the corresponding import tax
significantly. More importantly, relative to the “lowest quote wins” selection rule, the optimal
mechanism is Pareto-improving for the retailer and the service provider when the hidden rebate
is below a certain threshold. Furthermore, we extend our analysis to the case when: (1)
the retailer is not sure whether the designated manufacturer is ethical or not, (2) the hidden
rebate is endogenously determined, and (3) there are multiple unethical manufacturers. We
also explore the stochastic incentive-compatible mechanism for the cases when the penalty is
unenforceable or enforceable.
In the second part, we examine a (large) manufacturer’s bribery decision (to bribe or not
to bribe) arising from a procurement auction under “disparate corruption pressure” when another
(small) manufacturer is known to offer the auctioneer (i.e., the intermediary) a bribe in
exchange for the right of first refusal. We discover that the large manufacturer should refuse to
pay bribes at all times to prevent from leaking its cost information to the small manufacturer
and prevent from intensifying the competition. However, even when the large manufacturer is
disadvantaged by the intermediary when refusing to offer bribes, we show that it can benefit
from the corrupted auction when the difference in production efficiency or the bribe is high so
that the “positive force” (i.e., cost advantage) derived from the right of first refusal dominates the information disadvantage. Hence, under a specific condition, the large manufacturer has
no incentive to expose the collusion between the intermediary and the corrupt manufacturer.
Such a “silence tactic” provides a plausible explanation for the prevalence of corrupt auctions
in practice.
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