Mechanism Design of Fashion Virtual Enterprise under Monitoring Strategy

Abstract

Designing a revenue sharing contract to prevent the moral hazard is one of the most important issues in virtual enterprise (VE). As the partners' productive effort level cannot be observed by the owner and other partners, there is usually moral hazard problem in VE. To mitigate the moral hazard, the owner sets the monitoring effort with monitoring cost. Considering a risk-neutral owner and multiple downside risk-averse partners, the owner's problem of determining the monitoring effort and incentive intensity to maximize his profit while the partners determine their productive effort to maximize their profit is addressed. The principal agent based model of this problem is proposed. By solving the model, the optimal strategy of owner and partner is derived. By comparing with the no monitoring scenario, we find that implementing suitable monitoring strategy can reduce the moral hazard effectively. Finally, by analyzing the partners' risk attitude, the result reveals that the lower the risk level of the partner is, the more the owner wants. These results suggest that VE should not only focus on the risk attitude but also on monitoring.