Research on incentive contracts for partners within a virtual enterprise

Abstract

A virtual enterprise is an ad hoc organization that combines the competencies of its partners and commits its resources flexibly to respond to business opportunities. To facilitate effective collaboration, the problem of the distribution of benefits among the partners within the virtual enterprise, which essentially is the principal-agent problem between the core enterprise and partner enterprises, must be solved effectively. This paper explores optimal contract problems by formulating a multi-task principal-agent model between a risk neutral core enterprise and a risk aversion partner enterprise, when the partner enterprise is engaged in “production” and “innovation” action entrusted by the the core enterprise within a virtual enterprise at the same time. The results show that the optimal incentive factor for “production” and “innovation” action of the partner enterprise is positively related to the action's marginal gains respectively, and negatively related to the action's marginal cost and the performance variance respectively. In order to promote the performance of “innovation”, on one hand, the core enterprise can directly award the partner enterprise's “innovation” according to the best incentive contracts, on the other hand, he can optimize incentive contracts for the partner enterprise's “production” to achieve the goal indirectly, and strengthening the incentive for “innovation” can not only increase the outcome of “innovation” but also improve the outcome of “production”.