2018-2019: Operations and Information Management

For more information please contact Prof. Bob Batt, bob.batt@wisc.edu.

Incentive Design for Operations-Marketing Multitasking

Prof. Chris Ryan, Associate Professor, Booth School of Business, University of Chicago

A firm hires an agent (e.g., store manager) to undertake both operational and marketing activities for a product. Marketing activities boost demand, but for demand to translate into sales, the agent must exert operational effort to ensure adequate inventory on hand. When demand exceeds available inventory, neither the firm nor the agent can observe unmet demand, a phenomenon known as demand censoring. The firm designs a compensation plan to induce the agent to put appropriate effort into both marketing and operations. We formulate this incentive design problem using moral hazard principal-agent framework with a multitasking agent subject to demand censoring. We develop a novel bang-bang control approach, with a general optimality structure applicable to a broad class of incentive design problems. Using this approach, we characterize the optimal compensation plan as consisting of a base salary and a bonus paid to the agent under one of the following two conditions: (a) all inventory above a predetermined threshold is sold, and (b) the sales quantity meets a downward-sloping inventory-dependent target. This structure implies non-monotonicity in the compensation plan: given the same sales outcome, the agent can be less likely to receive the bonus under a better inventory outcome. Furthermore, we find that inventory and demand outcomes can act as either complements or substitutes of each other in the compensation plan. Finally, we rule out the optimality of rudimentary compensation plans that generalize the logic of binary payment schemes from the single-tasking literature, revealing additional subtleties in the multi-tasking setting.

This is joint work with Tinglong Dai (Johns Hopkins University) and Rongzhu Ke (Hong Kong Baptist University).