Incentive contracts for green building production with asymmetric information

Abstract

When creating a product, a supplier faces the problem of designing the optimal contract to screen the manufacturer's private information. In this paper, we consider a manufacturer with private information about the cost type of production (N types defined in this paper) and its unobservable effort. Aiming to eliminate the negative effects on the green building market development caused by these two kinds of private information, we build a principal-agent model with asymmetric information. The optimal subsidy of the model is obtained by introducing the ‘spot check mechanism’. The results show that manufacturers with reasonable subsidies will not defraud the public about the actual quality of green buildings. Moreover, we discuss the impact of the probability of spot checks and subsidies on the optimal solution. Finally, a numerical example is given to show the effectiveness of the obtained results.