Incentive Contract in Supply Chain with Asymmetric Information

The supply chain always appears inefficient because of the different targets of members and information asymmetry, especially when upstream enterprises not only hide information about their effort levels, but also hide information about their technology level. The paper uses principal-agent theory and the theory of regulation to design the contract to realize the maximization of principal's profit on the condition that the contract satisfies the participant and incentive conditions of agent. As a result, it is obvious that the contract achieves the goal of control. In addition, it also can be concluded that the amount of rent that the manufacturer can obtain is up to the value of his information and the condition of his resource. 1. Introduction Supply chain is a network which can put suppliers, manufacturers, distributors, retailers, and final users together, which is characterized by the integration of external resources for cooperation networks. Supply chain performance depends on the joint benefit of the enterprises [1]. However, the supply chain always appears inefficient because of the different targets of members and information asymmetry. Therefore, an important issue in supply chain management is how to establish the appropriate coordination mechanism for the independent enterprises in order to achieve the maximization of the overall profit of the supply chain [2–8]. Because of information asymmetry, the difficulty of coordination increases [9]. Many contracts and pieces of literature have studied the coordination of supply chain from perspective of principal-agent problem, while, at the same time, various aspects of coordination in supply chain have been studied too, such as pieces of literature [10–16]. In practice, the effort level of retailers can affect products’ demand. Literature [17] puts the effort level and risk preference of decision-making of node enterprise into decision-making model and analyses their impact on the decision and cooperation of supply chain. The literature [18] investigates the issue of channel coordination for a supply chain facing stochastic demand that is sensitive to both sales effort and retail price. In the literature [19], a perishable product’s supply chain consisting of a manufacturer and a retailer is considered; on the premise of retailer’s effort and return price dependent demand, the mathematical models of quantity flexibility contract are established. The literature [20] analyses retailer’s effort level’s impact on supply chain revenue-sharing evolvement- contract and gain retailer’s effort level’s