Multi-target incentive contracts are widely observed in practice to stimulate salesforce effort. However, little is known about their effectiveness and the issues involved in designing them. In this study, we investigate the incentive contracting problem between a manufacturer and an agent when the realized sales of a product are affected by both the agent's selling effort and the type of the agent. The agent's type is uncertain to the manufacturer, whereas the agent can observe the actual type when exerting her selling effort. Again, this is unobservable by the manufacturer. For the contract design problem with two agent types, we develop a principal-agent model with both moral hazard and adverse selection. We examine the manufacturer's optimal design of a dual-target contract. Because menu contracts are commonly studied in literature for the adverse selection problem, we also study a menu of single-target contracts, and examine the manufacturer's optimal contract parameter decisions. Through comparing the performance of the two types of contracts, we identify the situations under which the dual-target contract performs as good as or better than the menu contract.
|Published - 22 Sept 2016
|ICBER 2016 : 2016 6th International Conference on Business and Economics Research - Holiday Inn Vancouver-Centre, Vancouver, Canada
Duration: 21 Sept 2016 → 23 Sept 2016
|ICBER 2016 : 2016 6th International Conference on Business and Economics Research
|21/09/16 → 23/09/16