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Incentive contract design considering quotas production: A principal-agent perspective
Sen Liu1, Lei Wang2, Xuejiang Shi2
1School of Logistics and Management Engineering, Yunnan University of Finance and Economics, Kunming, 650221, China.
Heliyon
|January 31, 2024
Summary
Incentive contracts for supply chains can improve product quality by motivating agents. Contract design is crucial, especially with production quotas, to balance agent effort and principal profit.
Area of Science:
- Supply Chain Management
- Contract Theory
- Operations Research
Background:
- Supply chain product quality depends on agents and principals.
- Principals face quota production constraints.
- Agent and principal decision-making influences outcomes.
Purpose of the Study:
- Design incentive contracts for supply chain agents.
- Analyze contract parameters, effort levels, and profits.
- Compare agent and principal decision-making.
Main Methods:
- Derived contract parameters, effort levels, and profit functions.
- Compared agent and principal decision-making paradigms.
- Conducted numerical experiments on contracting and effort strategies.
Main Results:
- Agent effort costs and organizational variables influence decisions.
- Incentive contracts increase agent effort and product quality.
- Bilateral efforts and contract calibration impact risk and profit.
- Appropriate quality quotas are necessary for principals.
Conclusions:
- Effective incentive contracts can enhance supply chain performance.
- Contract design must consider unilateral and bilateral agent efforts.
- Balancing risk and reward is key for both agents and principals.
- Production quotas require careful consideration in contract design.
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