Principal-Agent Theory Based Risk Allocation Model for Virtual Enterprise

Min Huang, Guike Chen, Wai-Ki Ching, Tak Kuen Siu

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DOI: 10.4236/jssm.2010.32030                

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.

Keywords

Virtual Enterprise, Risk Allocation, Principal-Agent Theory, Risk Aversion, Common Agency

Conflicts of Interest

The authors declare no conflicts of interest.

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