Motivating Supplier Social Responsibility under Incomplete Visibility

Problem Definition: We examine how a profit-driven firm (she) can motivate better social responsibility (SR) practices by a supplier (he) when these practices cannot be perfectly observed by the firm. We focus on the firmu0027s investment in the supplieru0027s SR capabilities. To capture the influence of consumer demands, we incorporate the potential for SR information to be disclosed by the firm or revealed by a third party. Academic/Practical Relevance: Most firms have limited visibility into the SR practices of their suppliers. However, there is little research on how a firm under incomplete visibility should (i) invest to improve a supplieru0027s SR practices and (ii) disclose SR information to consumers. We address this gap. Methodology: We develop a game-theoretic model with asymmetric information to study a supply chain with one supplier and one firm. The firm makes her investment decision given incomplete information about the supplieru0027s current SR practices. We analyze and compare two settings -- the firm does not disclose versus she discloses SR information to the consumers. Results: The firm should invest a high (low) amount in the supplieru0027s capabilities if the information she observes suggests the supplieru0027s current SR practices are poor (good). She should always be more aggressive with her investment when disclosing (versus not disclosing). This more aggressive strategy ensures better supplier SR practices under disclosure. When choosing between disclosing and not disclosing, the firm most likely prefers not to disclose when the supplieru0027s current SR practices appear to be average. Managerial Implications: (i) Greater visibility helps the firm to better tailor her investment to the level of support needed. (ii) Better visibility also makes the firm more truthful in her disclosure, while increased third-party scrutiny makes her more cautious. (iii) Mandating disclosure is most beneficial for SR when the suppliersu0027 current practices appear to be average.