Incentive Contract Design to Improve the Service Quality in Third Party Logistics: a Moral Hazard Model

Abstract

The problem of how a buyer (principal) incites her logistics supplier (agent) to improve the service quality is studied. Taking account of three pay mechanisms, i.e., the gain-sharing scheme, the penalty scheme and the fixed payment scheme, we applied the principal-agent theory to our analysis and developed a moral hazard model. The results reveal that the optimal contract includes only a fixed initial payment under symmetric information. But, it is the combination of the above three mechanisms under asymmetric information. Furthermore, if the gain-sharing is bigger, the fixed payment and the penalty are lower; otherwise, if the penalty is more severe, the fixed payment is more and the gain-sharing is lower. In addition, the agent's risk aversion is bigger, the principal pays more agency costs. Finally, our analysis shows the buyer losses partial profits under asymmetric information owing to the lack of information and trading efficiency reduces because of asymmetric information.