Effectiveness of Bonus and Penalty Incentive Contracts in Supply Chain Exchanges: Does National Culture Matter?

The purpose of this study is to investigate the impact of national culture on the effectiveness of bonus and penalty contract incentive structures in supply chain exchanges. We conduct laboratory experiments in Canada, China, and South Korea, involving transactional exchanges in which suppliers are presented with either bonus or penalty contracts. We then evaluate suppliers’ contract acceptance, effort level, and shirking comparatively across national culture. Our findings reveal critical cultural influences on contract efficacy. We show that while acceptance of bonus contracts is comparable across cultures, suppliers from Canada, associated with a national culture low in power distance and high in humane orientation, exhibit lower acceptance rates on penalty contracts. We also find some evidence that suppliers associated with collectivist cultures reward bonus contracts with greater effort and less shirking, but that these relationships are more complex. When contract effectiveness is compared across bonus and penalty contracts within a given cultural setting, we find that bonus contracts are accepted more than penalty contracts in all three countries. Also, after contracts are accepted, bonus contracts are more successful in China as suppliers exert higher efforts and shirk less under bonus contracts than penalty contracts, while accepted contracts are nearly indistinguishable in Canada and South Korea.