Short?term vs. Long?term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction

In laboratory experiments, we compare the performance of short-term and long-term contracts in a two-period supplier–buyer dyad with asymmetric cost information. We find that buyers tend to reject offers if payoff inequality increases from one period next. coin this dynamic form inequity aversion as “ratcheting aversion.” show under contracting, buyer's ratcheting limits supplier's leeway exploit information revelation earlier periods because suppliers fear contract rejections later periods. As result, suppliers' empirical benefit offering over is significantly larger than theory predicts. Furthermore, enable supply chain partners achieve less volatile buyers' leads more contracting. While normative predicts should include all future informational rents first-period offer, thereby creating large differences between periods, it can be behaviorally optimal for supplier make lead equitable payoffs