Design of Contract Considering Manufacturers' Moral Hazard for Carbon Emission Reduction under Government Punishment Mechanism

Aiming at the two-stage supply chain composed of manufacturers and retailers, it is assumed that all enterprises upstream and downstream strive to implement carbon emission reduction. Because of information asymmetry, manufacturers have a moral hazard in reducing carbon emissions. At the same time,...

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Bibliographic Details
Published in:IAENG international journal of applied mathematics 2022-12, Vol.52 (4), p.1-10
Main Authors: Wu, Le, Wang, Yan-Juan, Zhang, Cheng-Tang
Format: Article
Language:English
Subjects:
Carbon
Contracts
Emission analysis
Emission standards
Emissions control
Moral hazard
Profits
Retail stores
Supply chains
Upstream
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Summary:Aiming at the two-stage supply chain composed of manufacturers and retailers, it is assumed that all enterprises upstream and downstream strive to implement carbon emission reduction. Because of information asymmetry, manufacturers have a moral hazard in reducing carbon emissions. At the same time, the government decides whether to implement punishment or not by testing the carbon emission reduction standards of the product declared by manufacturers and retailers. This paper focuses on the impact of manufacturers' moral hazard probability and government punishment level on carbon emission reductions and profits of upstream and downstream enterprises. The study results show that when the government penalty intensity acts only on the retailer, the manufacturer must have an incentive for moral hazard behavior. The higher its moral hazard probability, the greater the retailer's expected profit loss. Therefore, a linear incentive contract design with fixed payments and adjustable incentive coefficients for retailers and an external loss-sharing contract design are investigated as a way to resolve the possible losses from moral hazards. The before and after comparison with the profit level and emission reductions also confirm the effectiveness of the contract design, which can ensure the manufacturer's expected profit. Achieve Pareto improvement of retailers' profits simultaneously. Linear incentive contracts have some limitations compared to external loss-sharing contracts. The analysis of examples further verifies the validity of the relevant conclusions.
ISSN:1992-9978
1992-9986