Informed Principal Model and Contract in Supply Chain with Demand Disruption Asymmetric Information

Abstract

Because of the frequency and disastrous influence, the supply chain disruption has caused extensive concern both in the industry and in the academia. In a supply chain with one manufacturer and one retailer, the demand of the retailer is uncertain and meanwhile may suffer disruption with a probability. Taking the demand disruption probability as the retailer’s asymmetric information, an informed principal model with the retailer as the principal is explored to make the contract. The retailer can show its information to the manufacturer through the contract. It is found out that the high-risk retailer intends to pretend to be the low-risk one. So the separating contract is given through the low-information-intensity allocation, in which the order quantity and the transferring payment for the low-risk retailer distort upwards, but those of high-risk retailer do not distort. In order to reduce the signaling cost which the low-risk retailer pays, the interim efficient model is introduced, which ends up with the order quantity and transferring payment distorting upwards again but less than before. In the numerical examples, with two different mutation probabilities, the informed principal contracts show the application of the informed principal model in the supply chain with demand disruption.