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Financing the overconfident newsvendor under the information asymmetry

  • 1.

    School of Management, University of Science and Technology of China, Hefei 230026, China

  • 2.

    International Institute of Finance, University of Science and Technology of China, Hefei 230601, China

Cite this:
https://doi.org/10.52396/JUST-2021-0105
  • Received Date: 11 April 2021
  • Rev Recd Date: 22 May 2021
  • Publish Date: 30 September 2021
    Abstract

  • Abstract

    Overconfident newsvendors perceive the expected outcome of an uncertain event as more certain than actuality.Built upon the classic newsvendor model, a system with a profit-maximizing bank and an overconfident retailer is studied, where the retailer is capital-constrained and might borrow bank loans. Based on retailers’ initial capital, we clarify them as severely poor, medium poor and rich, respectively. We obtain the equilibrium order quantity and bank interest rate under the information symmetry and asymmetry. Under the information symmetry, when the retailer is severely poor or medium poor, he always accesses bank loans. Under the information asymmetry, when the retailer is severely poor, he borrows from the bank. However, when the retailer is medium poor, he uses up all his initial capital without borrowing bank loans. The retailer with limited funds is willing to disclose his cognition of the market demand to the bank. The information asymmetry might reduce the loss of the system’s profit, which is caused by double marginalization effect.

    Abstract

    Overconfident newsvendors perceive the expected outcome of an uncertain event as more certain than actuality.Built upon the classic newsvendor model, a system with a profit-maximizing bank and an overconfident retailer is studied, where the retailer is capital-constrained and might borrow bank loans. Based on retailers’ initial capital, we clarify them as severely poor, medium poor and rich, respectively. We obtain the equilibrium order quantity and bank interest rate under the information symmetry and asymmetry. Under the information symmetry, when the retailer is severely poor or medium poor, he always accesses bank loans. Under the information asymmetry, when the retailer is severely poor, he borrows from the bank. However, when the retailer is medium poor, he uses up all his initial capital without borrowing bank loans. The retailer with limited funds is willing to disclose his cognition of the market demand to the bank. The information asymmetry might reduce the loss of the system’s profit, which is caused by double marginalization effect.
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    • References(37)
  • [1]
    Johnson D D, Fowler J H. The evolution of overconfidence. Nature, 2011, 477: 317–320.
    [2]
    Ren Y, Croson D C, Croson R T. The overconfident newsvendor. Journal of the Operational Research Society, 2017, 68(5): 496-506.
    [3]
    Weinstein N D. Unrealistic optimism about future life events. Journal of Personality and Social Psychology, 1980, 39(5): 806-820.
    [4]
    Taylor S E, Brown J D. Illusion and well-being:A social psychological perspective on mental health. Psychological Bulletin, 1988, 103(2): 193-210.
    [5]
    Ren Y, Croson R. Overconfidence in newsvendor orders: An experimental study. Management Science, 2013, 59(11):2502-2517.
    [6]
    Camerer C, Lovallo D. Overconfidence and excess entry: An experimental approach. American Economic Review, 1999, 89(1): 306-318.
    [7]
    Glaser M, Weber M. Overconfidence and trading volume. The Geneva Risk and Insurance Review, 2007, 32(1): 1-36.
    [8]
    Howard M, Howard M E. The Causes of Wars and Other Essays. Cambridge, MA: Harvard University Press, 1984.
    [9]
    Johnson D D. Overconfidence and War. Cambridge, MA: Harvard University Press, 2009.
    [10]
    Malmendier U, Tate G. CEO overconfidence and corporate investment. The Journal of Finance, 2005, 60(6): 2661-2700.
    [11]
    Neale M A, Bazerman M H. The effects of framing and negotiator overconfidence on bargaining behaviors and outcomes. Academy of Management Journal, 1985, 28(1): 34-49.
    [12]
    Odean T. Volume, volatility, price, and profit when all traders are above average. The Journal of Finance, 1998, 53(6):1887-1934.
    [13]
    Moore D A, Healy P J. The trouble with overconfidence.Psychological Review, 2008, 115(2): 502-517.
    [14]
    Buzacott J A, Zhang R Q. Inventory management with asset-based financing. Management Science, 2004, 50(9): 1274-1292.
    [15]
    Pfohl H C, Gomm M. Supply chain finance:Optimizing financial flows in supply chains. Logistics Research, 2009, 1: 149-161.
    [16]
    Dada M, Hu Q. Financing newsvendor inventory. Operations Research Letters, 2008, 36(5): 569-573.
    [17]
    Zhou J, Groenevelt H. Impacts of financial collaboration in a three-party supply chain.Rochester, NY: Simon Business School, University of Rochester, 2008.
    [18]
    Zhang G. The multi-product newsboy problem with supplier quantity discounts and a budget constraint. European Journal of Operational Research, 2010, 206(2): 350-360.
    [19]
    Zhang Y, Huang S, Yang S A.Financing inventory under bank capital regulation and seller orchestration. https://ssrn.com/abstract=3391681.
    [20]
    Bi C, Zhang B, Yang F, et al.Selling to the newsvendor through debt-shared bank financing. European Journal of Operational Research, 2022, 296(1): 116-130.
    [21]
    Kouvelis P, Xu F. A supply chain theory of factoring and reverse factoring. Management Science, 2021, 67(10): 5969-6627.
    [22]
    Zhao L, Huchzermeier A. Supply Chain Finance. Berlin: Springer: 2018: 105-119.
    [23]
    Chen X, Wang A. Trade credit contract with limited liability in the supply chain with budget constraints. Annals of Operations Research, 2012, 196: 153-165.
    [24]
    Kouvelis P, Zhao W. Financing the newsvendor: supplier vs. bank, and the structure of optimal trade credit contracts. Operations Research, 2012, 60(3): 566-580.
    [25]
    Kouvelis P, Zhao W. Who should finance the supply chain? Impact of credit ratings on supply chain decisions. Manufacturing & Service Operations Management, 2018, 20(1): 19-35.
    [26]
    Deng S, Gu C, Cai G, et al. Financing multiple heterogeneous suppliers in assembly systems: Buyer finance vs. bank finance. Manufacturing & Service Operations Management, 2018, 20(1): 53-69.
    [27]
    Cachon G P, Fisher M. Supply chain inventory management and the value of shared information. Management Science, 2000, 46(8): 1032-1048.
    [28]
    Cakanyldirim M, Feng Q, Gan X, et al. Contracting and coordination under asymmetric production cost information. Production and Operations Management, 2012, 21(2): 345-360.
    [29]
    Cao E, Ma Y, Wan C, et al. Contracting with asymmetric cost information in a dual-channel supply chain. Operations Research Letters, 2013, 41(4): 410-414.
    [30]
    Zissis D, Ioannou G, Burnetas A. Supply chain coordination under discrete information asymmetries and quantity discounts. Omega, 2015, 53: 21-29.
    [31]
    Ma P, Shang J, Wang H. Enhancing corporate social responsibility:Contract design under information asymmetry. Omega, 2017, 67: 19-30.
    [32]
    Kerkkamp R, Van Den Heuvel W, Wagelmans A P. Two-echelon supply chain coordination under information asymmetry with multiple types. Omega, 2018, 76: 137-159.
    [33]
    Hilary G, Menzly L. Does past success lead analysts to become overconfident? Management Science, 2006, 52(4): 489-500.
    [34]
    Ishikawa M, Takahashi H. Overconfident managers and external financing choice. Review of Behavioral Finance, 2010, 2(1): 37-58.
    [35]
    Kamoto S. Impacts of internal financing on investment decisions by optimistic and overconfident managers. European Financial Management, 2014, 20(1): 107-125.
    [36]
    Zhou Yongwu, Liu Zhirui, Guo Jinsheng,et al. Research on order decision and coordination of overconfident retailers based on newsboy model. Operations Research and Management, 2012, 21 (3): 62-66. (In Chinese)
    [37]
    Li M, Petruzzi N C, Zhang J. Overconfident competing newsvendors. Management Science, 2017, 63(8): 2637-2646.
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    [1]
    Johnson D D, Fowler J H. The evolution of overconfidence. Nature, 2011, 477: 317–320.
    [2]
    Ren Y, Croson D C, Croson R T. The overconfident newsvendor. Journal of the Operational Research Society, 2017, 68(5): 496-506.
    [3]
    Weinstein N D. Unrealistic optimism about future life events. Journal of Personality and Social Psychology, 1980, 39(5): 806-820.
    [4]
    Taylor S E, Brown J D. Illusion and well-being:A social psychological perspective on mental health. Psychological Bulletin, 1988, 103(2): 193-210.
    [5]
    Ren Y, Croson R. Overconfidence in newsvendor orders: An experimental study. Management Science, 2013, 59(11):2502-2517.
    [6]
    Camerer C, Lovallo D. Overconfidence and excess entry: An experimental approach. American Economic Review, 1999, 89(1): 306-318.
    [7]
    Glaser M, Weber M. Overconfidence and trading volume. The Geneva Risk and Insurance Review, 2007, 32(1): 1-36.
    [8]
    Howard M, Howard M E. The Causes of Wars and Other Essays. Cambridge, MA: Harvard University Press, 1984.
    [9]
    Johnson D D. Overconfidence and War. Cambridge, MA: Harvard University Press, 2009.
    [10]
    Malmendier U, Tate G. CEO overconfidence and corporate investment. The Journal of Finance, 2005, 60(6): 2661-2700.
    [11]
    Neale M A, Bazerman M H. The effects of framing and negotiator overconfidence on bargaining behaviors and outcomes. Academy of Management Journal, 1985, 28(1): 34-49.
    [12]
    Odean T. Volume, volatility, price, and profit when all traders are above average. The Journal of Finance, 1998, 53(6):1887-1934.
    [13]
    Moore D A, Healy P J. The trouble with overconfidence.Psychological Review, 2008, 115(2): 502-517.
    [14]
    Buzacott J A, Zhang R Q. Inventory management with asset-based financing. Management Science, 2004, 50(9): 1274-1292.
    [15]
    Pfohl H C, Gomm M. Supply chain finance:Optimizing financial flows in supply chains. Logistics Research, 2009, 1: 149-161.
    [16]
    Dada M, Hu Q. Financing newsvendor inventory. Operations Research Letters, 2008, 36(5): 569-573.
    [17]
    Zhou J, Groenevelt H. Impacts of financial collaboration in a three-party supply chain.Rochester, NY: Simon Business School, University of Rochester, 2008.
    [18]
    Zhang G. The multi-product newsboy problem with supplier quantity discounts and a budget constraint. European Journal of Operational Research, 2010, 206(2): 350-360.
    [19]
    Zhang Y, Huang S, Yang S A.Financing inventory under bank capital regulation and seller orchestration. https://ssrn.com/abstract=3391681.
    [20]
    Bi C, Zhang B, Yang F, et al.Selling to the newsvendor through debt-shared bank financing. European Journal of Operational Research, 2022, 296(1): 116-130.
    [21]
    Kouvelis P, Xu F. A supply chain theory of factoring and reverse factoring. Management Science, 2021, 67(10): 5969-6627.
    [22]
    Zhao L, Huchzermeier A. Supply Chain Finance. Berlin: Springer: 2018: 105-119.
    [23]
    Chen X, Wang A. Trade credit contract with limited liability in the supply chain with budget constraints. Annals of Operations Research, 2012, 196: 153-165.
    [24]
    Kouvelis P, Zhao W. Financing the newsvendor: supplier vs. bank, and the structure of optimal trade credit contracts. Operations Research, 2012, 60(3): 566-580.
    [25]
    Kouvelis P, Zhao W. Who should finance the supply chain? Impact of credit ratings on supply chain decisions. Manufacturing & Service Operations Management, 2018, 20(1): 19-35.
    [26]
    Deng S, Gu C, Cai G, et al. Financing multiple heterogeneous suppliers in assembly systems: Buyer finance vs. bank finance. Manufacturing & Service Operations Management, 2018, 20(1): 53-69.
    [27]
    Cachon G P, Fisher M. Supply chain inventory management and the value of shared information. Management Science, 2000, 46(8): 1032-1048.
    [28]
    Cakanyldirim M, Feng Q, Gan X, et al. Contracting and coordination under asymmetric production cost information. Production and Operations Management, 2012, 21(2): 345-360.
    [29]
    Cao E, Ma Y, Wan C, et al. Contracting with asymmetric cost information in a dual-channel supply chain. Operations Research Letters, 2013, 41(4): 410-414.
    [30]
    Zissis D, Ioannou G, Burnetas A. Supply chain coordination under discrete information asymmetries and quantity discounts. Omega, 2015, 53: 21-29.
    [31]
    Ma P, Shang J, Wang H. Enhancing corporate social responsibility:Contract design under information asymmetry. Omega, 2017, 67: 19-30.
    [32]
    Kerkkamp R, Van Den Heuvel W, Wagelmans A P. Two-echelon supply chain coordination under information asymmetry with multiple types. Omega, 2018, 76: 137-159.
    [33]
    Hilary G, Menzly L. Does past success lead analysts to become overconfident? Management Science, 2006, 52(4): 489-500.
    [34]
    Ishikawa M, Takahashi H. Overconfident managers and external financing choice. Review of Behavioral Finance, 2010, 2(1): 37-58.
    [35]
    Kamoto S. Impacts of internal financing on investment decisions by optimistic and overconfident managers. European Financial Management, 2014, 20(1): 107-125.
    [36]
    Zhou Yongwu, Liu Zhirui, Guo Jinsheng,et al. Research on order decision and coordination of overconfident retailers based on newsboy model. Operations Research and Management, 2012, 21 (3): 62-66. (In Chinese)
    [37]
    Li M, Petruzzi N C, Zhang J. Overconfident competing newsvendors. Management Science, 2017, 63(8): 2637-2646.
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