On the design of coordinating contracts

We concentrate on a principal and agent system often seen in supply chain management studies. Under reasonable conditions, we show that a nearly systematic three-step method can be used to find coordination contracts for the system. The number of terms involved in our contract is in some sense positively correlated with the degree of information asymmetry between the principal and agent. Several known contract types for the supplier-retailer newsvendor system can be viewed as special cases resulting from applications of this method. Following our three-step approach, we succeed in identifying coordinating contracts for a supply chain involving two products and unobservable retailer efforts.