This paper studies the incentive issues that arise when
firms in a multilevel supply chain create value jointly by investing in information sharing. We consider three types of information
sharing: 1) supply-chain-wide information sharing; 2) downstream
information sharing; and 3) upstream information sharing. We
showed that the value of information sharing is higher for the upstream firms than for downstream firms regardless of information
sharing type. Furthermore, the value of information sharing for
any firm is higher under downstream information sharing than
upstream information sharing, and the incremental value of information sharing to a firm decreases when more downstream
firms share information. Therefore, if there is a cost associated
with information sharing, then upstream firms have an incentive to
free ride on downstream firms’ information sharing efforts. These
results suggest that serious incentive misalignments may impede
supply-chain-wide information sharing, even though it maximizes
the value to the supply chain, and that a mechanism to distribute
the overall surplus equitably may become essential. If a contract
distributes the surplus according to each firm’s incremental contribution to it, then firms that are in the middle levels of the supply
chain receive a higher share than those that are in either end of the
supply chain. That is, interestingly, neither the firm that possesses
the information that is propagated throughout the supply chain by
information sharing nor the most upstream firm realizes the highest value from information sharing obtains the maximum share of
the surplus generated under such a contract.