Direct Subsidy Incentive Capacity Restoration Contract under Supply Disruption Risk

Consider a supply chain consists of a supplier and a buyer. The supplier faces a risk of disruption and could rebuild the capacity if he has invested before the disruption. To motivate the supplier to invest and share the burden of capacity restoration, the buyer adopts a direct subsidy incentive contract. For this incentive contract, the buyer provides financial subsidy to share the capacity restoration cost of the supplier if there is a disruption. We also consider contract timing problem. We compare the Ex Post commitment strategy (the incentive contract is offered after disruption) and Ex Ante commitment strategy (the incentive contract is offered before disruption). We find that Ex Ante commitment strategy dominates Ex Post commitment strategy because it provides a wider parameter range for the investment decision of the supplier, and leads to profit improvement for both the supplier and the buyer.