Study On Contract Design Considering Members’Decision Making Reference-Points

More and more enterprise managers and scholars are focusing on the problem that how to design effective contracts to coordinate management decisions among the enterprises of supply chain or between the customer enterprise and the agency shop. Different with other previous articles, which have based their study of contract design upon the hypothesis of complete rationality, this thesis applies loss aversion and overconfidence to the study of contract design based on the research paradigm of behavioral operations management.Firstly, under the assumption of members owning loss aversion character, we establish a supply chain system composed of a rational supplier and a retailer with a probability of owning loss aversion character. The supplier’s task is to develop optimal contracts to maximize his expected profit given the probability of the retailer owning loss aversion character. The principle can design two forms of contracts:a pooling contract and a screening contract. Using game theory and incentive mechanism, we study the design processes of the pooling contract and screening contract respectively. We find that the effective screening contract can be designed only in the condition that the unit production cost is relatively low and that the supplier can choose the optimal contract by comparing his optimal expected profits under the two contracts, otherwise, the pooling contract is optimal. Our simulation, in which the unit production cost is relatively low, demonstrates that the supplier can get a higher expected utility under the screening contract as long as the effective screening contract can be designed.Secondly, under the assumption of members owning overconfidence character, we consider a principal-agent model in which the agent sales the principal’s products and gets his salary. In our model, the principle and the agent knowingly hold different beliefs regarding the mean and (or) the variance of the distribution of the stochastic demand, which raises the absolute overconfidence and relative overconfidence between the two members. The principle can design two forms of contracts:a linear contract and a threshold contract. All the optimal decisions in the two forms of contract under different combinations of the two members’overconfidence are obtained. We find that the threshold contract is better than the linear contract from the perspective of the principal if and only if the principle is more pessimistic than the agent with respect to the estimation of demand fluctuations and his estimation of the probability of demand fall into the region near the zero point is less than that from the point of the agent, thus the principle could improve his expected profit by adopting the threshold contract; otherwise, the principal’s equilibrium expected profits under the two forms of contract are the same, which means the threshold contract is equivalent to the linear contract from the perspective of the principal.