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The Game Analysis of Manufacturers' Political Connections on Product Hindawi Publishing Corporation Discrete Dynamics in Nature and Society Volume 2013, Article ID 695384, 5 pages http://dx.doi.org/10.1155/2013/695384 Research Article The Game Analysis of Manufacturers’ Political Connections on Product Safety in Supply Chain: Evidence from China Zhao Na and Wang Fusheng School of Management, Harbin Institute of Technology, Harbin 150001, China Correspondence should be addressed to Wang Fusheng; [email protected] Received 18 June 2013; Revised 20 September 2013; Accepted 29 October 2013 Academic Editor: Tinggui Chen Copyright © 2013 Z. Na and W. Fusheng. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. This paper studied the political connections on product safety insupply chain. In market economy, information asymmetry exists throughout the entirety of supply chains that ought to ensure product safety. Due to the existence of game relations between the government and manufacturers in the aspects of product safety and regulation, the formation of market equilibrium depends on political connections between the government and manufacturers. Based on study and analyses of a static game model and a dynamic game model, this paper reveals that governments and manufacturers must use positive political connections to achieve product protection and supervision of safety throughout the supply chain. On the other hand, negative political connections lead to losses of both governmental credibility and social profits. Thistudy s indicates that inherent mechanism of political connections exists in the supply chain; it will help to enrich the theory of supply chain. 1. Introduction the manufacturers should develop and enforce their own techniques for ensuring production quality, sustaining the Product safety is an issue of utmost importance all around self-regulation of the industry, and maintaining the profes- theworldanditisrelatedtothesupplychaininitsentirety. sional ethics of the employed. In order to strengthen the The situation brings some new problems to traditional supply safety supervision of special equipment, prevent accidents, chain [1]. As the world’s second largest economy, with ensure the safety of people’s lives and property, and promote frequent international business and a large population, China economic development, China has made related laws to considers product safety a top priority. Product safety affects constrain product safety issues, such as Article 5 in the not only national credibility and the credibility of companies Constitution of the People’s Republic of China, Article 146 but also the important basic commitments of a nation and in the PRC Criminal Law, and Article 14, Article 15, Article its enterprises for users. However, because of information 49,andArticle50inthePRCProductQualityLaw.However, asymmetry, product users require product manufacturers laws and regulations are a double-edged sword. When they to be highly disciplined and require strict supervision and aresupposedtoserveafunctioninbindingconstraintsto management of government departments. “Product” refers protect the majority of people, the government appears to to everything available in the market that can meet the use administrative powers to participate in certain economic specific needs of people, including in-kind, service assurance, activity concerning political connections with enterprises, ideas, and other forms. “Security” refers to the conditions thus creating opportunities for a few privileged persons to that prevent death, injury, occupational diseases, equipment achieve excess revenue. According to the statement of two damage, property damage, and environmental damage. economists, Buchanan and Krueger, this excess revenue is Ensuring the safety of products first depends on sound called“rent”.Theactivitiesofseekingauthoritytoobtainrent laws and regulations. In addition, government departments are called “rent-seeking activities” [2, 3]. must work with the law, enforce the law, properly regulate Therefore, to pursue increased benefits, manufacturers rules, and abandon favoritism or irregularities. Second, circumvent or address legal and regulatory risks so that 2 Discrete Dynamics in Nature and Society certainpeopleobtainprivilegesandexcessrevenueviarent- Table 1: Game matrix of the government and manufacturers. seeking activities that establish political connections with Government the government. Political connection is different from the Manufacturers government intervention. It is a dynamic interaction of the Nonsupervision Supervision 1 1− relationship between government and enterprises. General- 1 − − − ized political connections: it is described in order to achieve Value product safety 2 2, 1 2,0 1− − − the enterprise or individual interests, and the government Neglect product safety 2 3, 3 1 0, −5 directly or indirectly is related to the collective or individual behavior. Narrow political connections: it refers to the exis- tence of a political background of personnel in the enterprise Table 2: Game matrix of the government and manufacturers. shareholders, board of directors, and management. These Government Manufacturers political connections link the interests of enterprise, govern- Nonsupervision Supervision 1 ment, and individual. The definition of political connections 1−1 in this paper takes into account the standard definitions used − − Value product safety 2 2, 1 −3, 3 −1 in the literature. Agrawal and Knoeber show that politically 1− − − − experienced directors might affect their performance in U.S. Neglect product safety 2 2,0 0, 4 5 manufacturing firms [4]. Khwaja and Mian bring to light the role of ex-politicians in providing government bank loans to politically connected firms5 [ ]. Fan et al. define a Chinese the government and manufacturers as well as their behavior firm as being politically connected if the CEO is a current or in the supply chain production. Static game is the principle former officer of the central government, local government, that actors either participate in the selection simultaneously or the military [6]. Ferguson and Voth consider firms to be or, if they are not in the same selection, the latter actor does political connections if the executives and supervisory board not know the specific action that had been taken earlier in the members were close to the ruling party [7]. Our definition of game. The game between the government and manufacturers political connections uses the special political connections; it constitutes a static game with complete information [11]. covers current and former political connections research. The Assumptions: (a) the cost used by the government to root of rent originates from the formation of price differences monitor the safe behavior of manufacturers by administra- because demand increases for this kind of production factor, tive, economic, legal, and other means is 1,anditsprobabil- whereas supply cannot increase due to various other factors. ity is 1; (b) if manufacturers can recognize the importance However, Kruger believes that rent seeking is a dredging of product safety, fulfill quality commitment, and actively activity conducted to obtain licenses and quotas to gain cooperate with government regulations, the cost paid should additional revenue. Therefore, political connections will have be 2, and the intangible benefit brought by credibility is a positive effect on firm value as a rent-seeking behavior of M,whichhasaprobabilityof2; (c) if manufacturers focus enterprise [8], it will help enterprises on product safety in only on short-term interests and behave contrarily to industry supply Chain process. ethics, the cost of compulsory fines, legal responsibilities, From the perspective of game theory [9], by building and the damage of social image resulting from product static and dynamic game models, this paper analyzes the safety issues is 3; (d) the lost social cost when negative game relationship of how political connections between political connections are established between the government government and manufacturers mutually restrain and make and manufacturers, which means that governmental officials contact with each other on product safety in supply chains. profit by ignoring product safety issues as companies label It also reveals that political connections between the govern- substandard products as fine products under the security ment and manufacturers are crucial in product safety in the umbrella of government to obtain excess revenue, should be product supply chain, and both sides need to collaborate with 4; the cost of losing the governmental credibility is 5. eachotherandfulfilltheirdutiestobetterensureproduct The political game matrix between manufacturers and safety throughout the entire supply chain [10]. This paper government is shown in Table 1. for the first time mentions political connections in supply Under the assumption that worldwide concerns on prod- chainandintroducedthetheoryofpoliticalconnectionsinto uct safety continue to increase, if the government does not supplychaintheory.Itwillnotonlyenrichtheresearchof handle the product safety issues of manufacturers properly, supply chain and political connections, but also will reveal the government’s image will incur damage. When 5 is the internal mechanism about political connections on safety smaller than 1 −3, Nash equilibrium occurs (ignoring production in
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