Cost-Sharing Agreements for the Financing of Customized Product Purchase Orders Under Asymmetric Information

Abstract

We explore the combined optimization of financial and operational decisions initiated by a buyer’s cooperation with a supplier for customized production. A cost-sharing agreement provides a powerful incentive to enhance suppliers’ delivery performance within an alliance relationship. We categorize the costs into production and effort costs to investigate the effects of two kinds of cost-sharing agreements. The demand for customized products presents a significant challenge for suppliers, particularly small and medium-sized enterprises facing financing and delivery issues. It contributes to the combined effect of purchase order financing and cooperative cost-sharing agreements. We consider the supplier’s efficiency information asymmetry and obtain results regarding the signal game, describing the interactions among the supplier, buyer, and banks. This article examines the contract parameter settings (price and cost-sharing fraction) and how various signaling mechanisms (signal type or signal quantity) influence delivery and profits (tradeoff between separation costs and information rent). We show that strategically designing the signals can extend the feasible region for the least costly separating equilibrium. The findings highlight the varied roles of cost-sharing agreements in delivery incentives and supply chain coordination, offering valuable directions for managers to leverage cost-sharing agreements for improved strategy formulation in information signaling mechanisms.