A Principal-Agent Approach to Incentive Mechanisms in Supply Chains

A principal-agent mechanism is introduced to study the coordination in the supply chain with a dominant enterprise and other dominating ones. The incentive mechanism is taken into account to design effective contracts which can solidify the relationship between dominating and dominated enterprises in the supply chain. Firstly, a dynamic principal-agent model was set up based on a set of assumptions and common senses. By solving this model, parameters for an optimal contract are determined to maximize the total production of the supply chain as well as the profits of individual enterprises. Moreover, an analysis to mathematic solution is conducted and strategies which can improve the performance of the supply chain are presented