Supply Chain Contract with Double Incentives: An Agency-Theoretic Perspective

The problem of designing an incentive contract to coordinate a two-level supply chain is studied in this paper. In a context of one supplier and one retailer supply chain, because of the existence of asymmetric information, most of the retailer´s actions are unobservable by the supplier, thus can´t be contracted accordingly. To ensure a win-win outcome for both sides, an effective linear contract is developed. Quantitative results are then presented to illustrate the appropriateness and rightfulness of the contract. Furthermore, a comparison is employed and two contracts are evaluated in terms of the cost paid by the principal and the income received by both sides. Relative advantages of the contract are explained.