DOUBLE MORAL HAZARD IN SUPPLY CHAIN BASED ON OVERCONFIDENCE BIAS

Based on principal-agent theory, this paper introduces default compensation and default tendency into primary contact between manufacturers and overconfident suppliers in a supply chain. We present the impact of default compensation and suppliers' overconfidence level on decisions of both sides under double moral hazard condition. The conclusions suggest that the default compensation in primary contract can effectively decrease the manufacturers' default tendency, motivate suppliers to work hard, and thus decrease double moral hazard on both sides. Though overconfidence can boost suppliers' efforts, and cooperating with an overconfident supplier can reduce the agency costs, overconfidence may cause fluctuations in market, which is why relative policies should be made to guide and control the overconfidence level.