Delivery time contract design of fourth party logistics under asymmetric information

Abstract

Fourth party logistics is an integrated logistics service supplier, bringing together the demand of logistics client and supply of third party logistics, and is responsible for client's logistics activities. It is necessary for fourth party logistics to manage the risks in third party logistics' delivery process, such as delivery time delay. This paper studies delivery time risk management from contract design perspective. Based on principal-agent theory, we propose mathematical models and derive optimal contract parameters for fourth party logistics and optimal effort level for third party logistics. The contract can induce the third party logistics to exert optimal effort level in fourth party logistics' interest. Considering the third party logistics' private cost information, we investigate two type contracts design under asymmetric information. The result shows that the asymmetric cost information always benefits third party logistics, and the fourth party logistics needs to pay information rent. We also discuss the applicability of these two contracts. Numerical experiments are conducted to study the influence of two contracts on the expected profit of fourth party logistics and third party logistics.