Incentive Contracts in Logistics Outsourcing

Recent development in logistics has led to wide use of external service providers. This paper aims to apply the agency theory to study the cooperative relationship between outsourcing enterprise and their logistics service providers through the use of incentive contracts. The problem is modeled as a risk-neutral outsourcing enterprise hiring multiple risk-averse service providers to conduct different logistics tasks. The outsourcing enterprise is regarded as principal, while their service providers are referred as agents. Each agent makes his own decision on the amount of additional work to exert into the project. The incentive provided by the principal is typically tied to the amount of time ahead of scheduled deadline. The goal of this paper is to study the design of optimal contracts that balance the incentives and risks of the agents from the view of the principal, in order to achieve maximized profits for all the parties.