A study on mechanism design for reducing risk in the Belt and Road international trades under Internet circumstances

LI Xiaoying1 LI Lingfang1

(1.School of Management, Fudan University)
【Knowledge Link】payment after delivery

【Abstract】Trading risk due to asymmetric information is one of the main issues in international trades. Most of the countries involved in the Belt and Road Initiative have high risks in trades, and the asymmetric information problem is relatively severe. Report disclosure is a kind of reputation mechanism which can help trades alleviate moral hazard problems via disclosing non-payment records. We use dynamic signaling model to study the effect and scope of this mechanism. We find that “report disclosure” has several benefits. (1) It increases the total social welfare and the total trading volume. (2) It protects sellers, and helps sellers to avoid losing money because of underestimating the default risk. (3) It lowers the market prices, and protects honest buyers from default. However, report disclosure mechanism does not work in all cases as it will be affected by the turnover rate of buyers in the market. Under the Belt and Road Initiative, policy makers can decide whether to adopt the report disclosure mechanism depending on their own objectives. (1) If the policy maker’s objective is to protect exporters, and the market price is relatively low, then it is better to adopt the report disclosure mechanism. (2) If the policy maker’s objective is to protect importers and the markets where the market price is relatively high, buyers’ turnover rate is relatively low and the executive cost is relatively low, then it is better to adopt the report disclosure mechanism, and to cooperate with the e-commerce platforms of the countries involved in the Belt and Road Initiative by disclosing the defaulting buyers’ information.

【Keywords】 asymmetric information; moral hazard; signaling game; reputation; trust;


【Funds】 National Natural Science Foundation of China (71522007) National Natural Science Foundation of China (71490721) “Dawn” Program of Shanghai Education Commission, China (17SG05)

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    [1]. ① http://news.xinhuanet.com/politics/19cpcnc /2017-10/27/c_1121867529.htm [^Back]

    [2]. ② http://www.scio.gov.cn/video/qwjd/34146/Document/1616840/1616840.htm [^Back]

    [3]. ① http://www.sohu.com/a/130705996_236988 [^Back]

    [4]. ② There is also a moral hazard in the transaction mode that the buyers pay the earnest money first, then the sellers deliver the commodities, and the buyers make the final payment. The buyers may not make the final payment. [^Back]

    [5]. ③ Data are from the calculation of Chinese Academy of International Trade and Economic Cooperation and China International Economic and Trade Arbitration Commission (http://money.163.com/13/0326/09/8QSO4ODI00253B0H.html). Due to the factors such as fierce export competition and lack of risk awareness, the export enterprises in China were more inclined to choose the transaction mode of “payment after delivery” than developed countries in Europe and the US. Thus, the rate of bad debts of export enterprises in China was much higher than that in developed countries in Europe and the US (Yi, 2008) [^Back]

    [6]. ④ http://news.xinhuanet.com/politics/19cpcnc /2017-10/27/c_1121867529.htm [^Back]

    [7]. ⑤ It is among the series of reports on the Belt and Road Initiative driving the transformation and upgrading of the Yiwu markets (http://www.yw.gov.cn/zfzx/mryw/201801/t20180129_1343195.shtml). [^Back]

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    [9]. ① It comes from the contract fraud case data from 2009 to 2017 released on the official WeChat platform of the economic investigation brigade of Yiwu public security bureau. [^Back]

    [10]. ② This conclusion is consistent with the features reflected by the statistics about foreign trade cases by the Yiwu public security bureau (http://jz.yiwugou.com/mayormail/newsdetail_334821_1.html). [^Back]

    [11]. ① Even if the sellers can voluntarily fill in positive or negative feedback, only negative feedback is valid. In online transactions of e-commerce platform, the buyers give feedback to the sellers, and there is no competitive relationship between the buyers. However, in the offline transactions of “payment after delivery,” the sellers give feedback to the buyers, and there is a competitive relationship between the sellers. When the sellers encounter honest buyers, they have no incentive to give positive feedback, because giving positive feedback is equal to leaving the buyers’ information to the competitors. Only when they encounter buyers without payment, they will have the motive to give negative feedback, considering the possibility of recovery or out of vindictive psychology, they will have the motive to give negative feedback. This is in accordance with the comment data observed by the authors on the report disclosure platform: the users are allowed to give comments freely on the platform’s message board, but only negative feedback provides valid information that can be verified, and many buyers hire Internet Water Army to give them positive feedback before they run away. Thus, only negative feedback is effective in the mechanism studied in this paper. [^Back]

    [12]. ② This model setting, a mixture of the hidden type and hidden action, is one of the main methods to study reputation mechanism (Bar-Issac and Tadelis, 2008). [^Back]

    [13]. ③ In this paper, the size of the seller’s discount factor does not influence the sellers’ and buyers’ strategies and conclusions, because the sellers are on the side with information disadvantages and the buyers are on the side with information advantages. The buyers and sellers are matched again randomly at the end of each period. Thus, the sellers’ discount factor is not set in the model. [^Back]

    [14]. ① The setting of indefinitely repeated game had been used in a large amount of research on reputation and cooperation. See Engle-Warnick and Slonim (2006), Camera and Casari (2009), and Fujiwara-Greve and Okuno-Fujiwara (2009). [^Back]

    [15]. ② The buyers’ search costs are usually not considered in the classic reputation model, that is, the costs of time and energy spent by the buyers in searching for commodities (Bar-Issac and Tadelis, 2008; Dellarocas, 2003; Greif, 1994). However, because in the setting of this paper, the buyers carry out uncertain repeated games and continue to stay in the market with the probability of α in each period, the setting of α not only reflects the buyers’ mobility, but also reflects the buyers’ search costs: the larger α is, the more the buyers will care about the benefits of future transactions, and the smaller the search costs will be. [^Back]

    [16]. ③ The Payoff in the model of this paper corresponds to the net earnings in real life. The seller’s payoff in real life can be understood as the seller’s economic profit, which is different from accounting profit. [^Back]

    [17]. ④ A survey shows that labor-intensive industries have high homogeneity, intense competition and low profit margin. It is also the reason why small commodity trade in Yiwu adopts “payment after delivery” to attract customers (http://news.sina.com.cn/c/sd/2012-07-16/162524783899.shtml). [^Back]

    [18]. ① In this paper, only the pure-strategy equilibrium is considered, because the results of pure policy equilibrium are sufficient to illustrate the effects of report disclosure platform. [^Back]

    [19]. ② In this model, when the expected payoffs of sellers in choosing to sell or not to sell are the same, we assume that all the sellers choose to sell. [^Back]

    [20]. ① Detailed process of proof is shown in the public attachment on the website of China Industrial Economics (http://www.ciejournal.org). [^Back]

    [21]. ② There is no Perfect Bayesian Equilibrium with different bids from honest buyers and opportunistic buyers. In addition, in the equilibrium that conforms to the intuitive criterion, honest buyers bid according to the lowest price that the sellers are willing to accept. See the public attachment on the website of China Industrial Economics (http://www.ciejournal.org). [^Back]

    [22]. ① To facilitate the comparison of model results, the payoff calculated here is the buyers’ or sellers’ average discounted payoff per period. The buyers’ average payoff is equal to the sum of the buyers’ payoff per period, divided by the total number of periods that the buyers stay in the market on average. [^Back]

    [23]. [^Back]

    [24]. ① If μ0i obeys other distributions, the basic conclusion of the model is still valid. However, the main purpose of this paper is to compare the effects of the report disclosure platforms in the extended model and in the basic model. Thus, in order to make the model clearer, only the situation that μ0i obeys the uniform distribution on [0, 1] is analyzed here. For the analysis of other situations, interested readers are encouraged to deduce it themselves. [^Back]

    [25]. ② Since the buyers and sellers are matched again randomly at the end of each period, transactions in each period are relatively independent, so the fact that honest buyers maximize the total payoffs of all periods is equivalent to maximizing and then totaling up the payoffs of each period. Thus, the honest buyers’ optimization problem is only about the payoff of each period. [^Back]

    [26]. ① In the extended model, some sellers choose not to sell in each period, so some opportunistic buyers exist in the market without transactions in the period from 0 to t − 1. [^Back]

    [27]. ② Detailed process of proof is shown in the public attachment on the website of China Industrial Economics (http://www.ciejournal.org). [^Back]

    [28]. does not depend on the assumption that “μ0iobeys uniform distribution.” [^Back]

    [29]. ② Detailed process of proof is shown in the public attachment on the website of China Industrial Economics (http://www.ciejournal.org). [^Back]

    [30]. ③ The sellers with the prior belief ofchange from not selling to selling. [^Back]

    [31]. ① Detailed process of proof is shown in the public attachment on the website of China Industrial Economics (http://www.ciejournal.org). [^Back]

    [32]. ① The social welfare here include the sellers’ payoffs and the paid buyers’ payoffs. Since non-payment is deceitful, the payoffs of buyers who do not pay are not taken into account in the calculation of social welfare. According to the usual model setting, the total number of buyers and sellers is set as 1. [^Back]

    [33]. ① The analysis on the trade of Yiwu in 2017 (http://jz.yiwugou.com/mayormail/newsdetail_334821_1.html) [^Back]

    [34]. ① Development of e-commerce of countries along the Belt and Road (http://www.ebrun.com/20160218/166105_3.shtml) [^Back]

    [35]. ② http://www.ebrun.com/20170630/236736.shtml [^Back]


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This Article


CN: 11-3536/F

Vol , No. 12, Pages 97-114

December 2018


Article Outline



  • 1 Introduction
  • 2 Basic model
  • 3 Extended model
  • 4 Model comparison and discussion
  • 5 Conclusion and policy implication
  • Footnote