Resolving Principal–Agent Misalignment in Decentralized Supply Chain Governance: A Mechanism Design Approach to Incentive-Compatible Contract Structuring

Authors

  • Jacob Wood Professor
  • Dana Williams Associate Professor
  • Adrian Davis PhD

Keywords:

principal–agent theory, mechanism design, incentive-compatible contracting, supply chain governance, information asymmetry, Nash bargaining equilibrium, moral hazard mitigation, decentralized operations management, performance-contingent transfer schedules

Abstract

Principal–agent misalignment in decentralized supply chains constitutes a persistent source of operational inefficiency, characterized by information asymmetry, moral hazard, and adverse selection in inter-organizational contracting. This study develops a mechanism design framework to engineer incentive-compatible contract structures that reconcile divergent objective functions between supply chain principals and downstream agents. Drawing on a multi-tier dataset of 412 manufacturing firms across three continents (2019–2023), we employ a combination of structural equation modeling and iterative Nash bargaining simulations to derive equilibrium contract parameters. Empirical results demonstrate that properly calibrated performance-contingent transfer schedules reduce coordination losses by 31.4% and improve supply chain surplus distribution equity by 22.7%. The findings provide actionable contract architecture guidelines for operations managers and procurement executives navigating high-complexity, multi-agent supply network environments.

Author Biographies

Jacob Wood, Professor

Professor
University of Leeds
University of Leeds, Maurice Keyworth Building, Leeds, LS2 9JT, United Kingdom

Dana Williams, Associate Professor

Associate Professor
Erasmus University Rotterdam
Erasmus University Rotterdam, Burgemeester Oudlaan 50, 3062 PA Rotterdam, Netherlands

Adrian Davis, PhD

PhD
Korea Advanced Institute of Science and Technology
KAIST College of Business, 85 Hoegiro, Dongdaemun-gu, Seoul, 02455, Republic of Korea

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Published

2026-05-13

Issue

Section

Articles