Price delegation and salesforce contract design with asymmetric risk aversion coefficient of sales agents

An important issue that has attracted the interest of academics and practitioners in both marketing and operations is, should pricing decisions be made by the firm or delegated to the salesforce? This problem has been addressed in the research literature based on the assumption that the exact risk aversion coefficients of the sales agents are known to the firm, which may not be true in most applications. In this paper, we study this problem but assuming that the risk aversion coefficients of agents are private information of the sales agents. For both centralized pricing and delegated pricing settings, the optimal compensation and pricing contracts are designed and the sensitivity analyses are conducted. An interesting finding is that the risk aversion and effort valuation have substitutable impacts on the pricing policy preference of the firm and the agents. Either strong risk aversion or high effort valuation can drive the firm and the agents to favor centralized pricing over delegated pricing. (C) 2015 Elsevier B.V. All rights reserved.