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Principal-Agent Theory Based Risk Allocation Model for Virtual Enterprise

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Author(s): Min Huang | Guike Chen | Wai-Ki Ching | Tak Kuen Siu

Journal: Journal of Service Science and Management
ISSN 1940-9893

Volume: 03;
Issue: 02;
Start page: 241;
Date: 2010;
Original page

Keywords: Virtual Enterprise | Risk Allocation | Principal-Agent Theory | Risk Aversion | Common Agency

ABSTRACT
In this paper, we consider a risk analysis model for Virtual Enterprise (VE) by exploring the state of the art of the principal-agent theory. In particular, we deal with the problem of allocating the cost of risk between two parties in a VE, namely, the owner and the partner(s). We first consider the case of a single partner of VE with symmetric information or asymmetric information and then the case of multiple partners. We also build a model for the optimal contract of the risk allocation based on the principal-agent theory and analyze it through specific example. At last we consider the case of multiple principal with potentially many partners based on common agency.
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Tango Jona
Tangokurs Rapperswil-Jona