Optimal contract design with a common agency in last-mile logistics

Abstract

Cooperative package collection is challenging given the lack of contract design to guarantee that the shared last-mile logistics (LML) provider divides the workload among all partners in a fair way, as it may influence the customer’s carrier choice when sending a package. However, the agency’s fairness may be influenced by principals’ individual incentives. To solve this issue, we establish a theoretical model with multiple principals (express companies) and a common agency (LML provider). We find that the optimal ex ante contract among collusive principals is a profit-sharing contract, which ensures that the principals have no motivation to take hidden actions to influence the agency’s workload division. We also provide the optimal incentive contract between the coalition and the agency.