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This work studies the management of compliance with sustainability requirements in a supply chain in a business environment in which monitoring and legal enforcement of penalties is challenging. This situation is relevant to firms operating in developing countries where it is hard to make suppliers pay penalties for poor quality. Because buyers are concerned with quality issues such as nonhazardous chemical content for their products, the questions of enforceability become particularly important. This research uses the framework of a two-level supply chain with one sided moral hazard in which the level of compliance by the supplier is modeled as a defect rate and is not contractible. We model the relationship between the buyer and supplier as a repeated game in which the relationship can be terminated by the buyer if the supplier violates the contract. It is shown that cooperative self-enforcing contracts dominate the relational contracts involving partnership termination. We study the properties of such contracts. As the loss of efficiency can be quite high, other collaborative approaches to compliance with sustainability goals may ultimately be more productive. We offer two-staged contracts as a new tool to reduce eciency loss characteristic to self-enforcing contracts. Such contracts discipline the suppliers by an artificial increase in their search costs. In the first stage, the supplier is forced to have low expected profit per production period. The second stage has higher suppliers expected profit and works as an incentive because of projected future rewards. This approach is new and contributes to the relational contract literature.
Mariya Bondareva was born in the USSR. After receiving a diploma with distinction from the Physics and Mathematics lyceum, she entered the East Kazakhstan State Technical University. Mariya graduated with honors and was awarded the degree of Engineer-Economist Systems Analyst in Business Information Systems. Mariya also holds a Candidate of Technical Science degree in Social and Economic Systems Management from Altai State Technical University, Barnaul, Russia. Before her doctoral study in the University of Rochester, she worked as a computer engineer and as a leading specialist in business administration at the Ulba Metallurgical Plant, a part of the state-owned nuclear holding company Kazatomprom. She began doctoral studies in Computer Information Systems at the University of Rochester in 2008 and received a Master of Science in Business Administration in 2011. During her studies, Mariya was an instructor for PhD and MBA level courses. Her research interests include: sustainable supply chains, operations management and service management in IT. In 2013, her research proposal Essays on Managing Quality and Service Standards was unanimously accepted by the dissertation committee at Simon Business School, University of Rochester.