Abstract
Theoretical operations management studies assume managers as rationalist, perfec-tionist, efficient, stable, risk neutral and profit-maximizing individuals. These assump-tions result in suboptimal decision making in practice. The main reasons behind the deviation from the theory are (i) bounded rationality, and (ii) different utility functions. In this thesis, we study these reasons in related business contexts and offer strategies to foster better decision making. Literature provides us with several contract mechanisms that can maximize the total payoff in a supply chain, namely coordinating contracts. However, laboratory experiments show that the performances of decision makers seem to worsen as the contracts get more complex. In our first chapter, we identify a coordi-nating contract that results in better decision making compared to other coordinating contracts. Importantly, we also identify mechanisms through which a contract may induce lower cognitive burden on subjects. Building on our results in the first chap-ter, we develop a novel experimental setting featuring a choice of contracts and also a choice of parameters; as a result, we find that, when given a choice, subjects choose the simpler contract more frequently over other types of contracts. This finding explains the popularity of such contracts in practice and emphasizes how mathematical equal-ity of the contracts does not translate to the practice if the bounded rationality is not taken into the consideration. On the other hand, our second chapter focuses on the effect of human interaction on managers’ choices when the performances of managers affect not only their but also other managers’ payoffs. A theoretically optimal incentive mechanism where the managers are expected to exert effort and truthfully share their information about their projects falls short in motivating subjects as project managers to exert effort. Unlike the theoretical assumptions, decision-makers do not adhere to a single strategy. They, rather, assign choice probabilities to strategies depending on the utility value of each strategy, which result in theoretical compensation mechanisms to be hardly effective in motivating managers to work hard and share information. The results suggest that companies can be better off adopting other strategies in addition to a balanced compensation mechanism to attain better performances from managers. We find that making resource allocation decision based on not only recommendations but also past actions of managers can hold managers accountable for their actions longer and increase their tendencies to exert high effort almost 50%. Moreover, we find trust to be an important factor determining the coordination levels of the decision makers.