Designing Incentive Systems for Truthful Forecast Information Sharing Within a Firm

• Published in: Management science Vol. 64; no. 8; pp. 3690 - 3713
• Main Authors: Scheele, Lisa M., Thonemann, Ulrich W., Slikker, Marco
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01.08.2018; Institute for Operations Research and the Management Sciences
• Subjects: Analysis; asymmetric forecast information; behavioral operations; Demand; Employee incentives; experimental economics; forecast error; Forecasts and trends; Human acts; Human behavior; Incentives; Information behavior; Information sharing; Management science; Observations; Planning; sales incentives; signaling
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.2017.2805

We consider a firm where the sales division ( Sales ) is responsible for demand forecasting and the operations division ( Operations ) is responsible for ordering. Sales has better information about the demand than Operations and sends a nonbinding demand forecast to Operations . To incentivize truthful information sharing, we include a forecast error penalty in the incentive system of Sales . Besides monetary payoffs, we also add behavioral factors to the utility function of Sales . We model the setting as a signaling game and derive the Pareto-dominant separating equilibria of the game. In laboratory experiments, we observe human behavior that is in line with the predictions of the behavioral model but deviates substantially from expected-payoff-maximizing behavior. We use the behavioral model to design incentive systems for truthful information sharing and validate the approach in an experiment with out-of-sample treatments and out-of-sample subjects. We conduct additional experiments to provide further robustness to the results. The experimental data and e-companion are available at https://doi.org/10.1287/mnsc.2017.2805 . This paper was accepted by Martin Lariviere, operations management.