Group Identity to Manipulate Social Preferences in Supply Chains with Costly E ffort

We analyze a supply chain in which a demand planner provides demand forecasts to a production planner. The production planner uses the forecasts to decide on the production quantities and needs information about the accuracy of the forecasts to determine the appropriate safety stock levels. The accuracy of the forecast depends on the effort that the demand planner invests in forecasting. The production planner cannot observe the effort and has to form a belief about the demand planner's effort level. If the actual effort of the demand planner and the belief of the production planner are not aligned, the overall performance of the supply chain suffers. We develop a game theoretic model to show how social preferences affect the alignment between the demand planner and the production planner. Using laboratory experiments we find support for the theoretical predictions: Some demand planners invest effort, and production planners anticipate this effort. We further show that group identity can be used to increase social preferences, thereby increasing the incentives for the demand planners to invest effort, which is anticipated by the production planners and leads to increased supply chain profitability