Analysis Based On The Principal-agent Model Of Supply Chain Risk Appetite

Traditional supply chain management models are based on risk-neutrality. But with the development of research on risk, more and more academics and practitioners turn their attention to risk-averse supply chains management. In these studies, it is argued that the retailers or suppliers arc risk averse, not risk neutral. Also, the risk attitude is often modeled as a parameter in the utility function, and the objective is to maximize the expected utility instead of the expected profit. However, in reality the risk attitude parameter of a decision maker may be private information, i.e., it is not known to other parties in the supply chain.Based on principal-agent theory, in this paper we consider a model with one risk-neutral factory and multiple risk-averse agents whose risk-averse parameters are asymmetric information. That is the exact value of the agent's risk attitude is only known to himself, but not to the factory. What the factory knows is only the probability distribution, which is public information. The factory's goal is design a mechanism to know the real value of each agent's risk attitude and maximize his profit in the same time. With rigorous mathematical derivation and precise logic analysis, we discuss how the mechanism should be designed and what kind of conditions should be met. Besides, how the mechanism parameters are affected by the promotion cost will be involved also.