Screening a supplier with fairness preference

Abstract

This paper is to study how a firm to screen an external supplier who has fairness preference using a general screening framework. The supplier with fairness preference provides products or services to the firm, and the firm designs a contract to screen the preference type of suppliers. The supplier’s fairness preference is adjusted by their ability difference, this paper analyzes how the supplier’s ability difference affect the optimal contract variables under the standard framework. The results illustrate that the larger ability difference will narrow the output difference between two different type suppliers. Associated with fairness preference, the probability distribution can increase or decrease the output difference. Furthermore, different strengths of the fairness preference would amplify or shrink the output difference between two different type suppliers.