Supply Chain Coordination with Sales Effort Effects and Impact of Loss Aversion on Effort Decision

A new supply contract based on sharing the sales profits as well as the cost of effort was developed to coordinate the supply chain with sales effort effects. The contract coordinates the supplier’s actions with voluntary compliance; the contract is symmetric in the sense that both the supplier’s and retailer’s profits are linearly correlated and is more easily implemented in some situations. The impact of the retailer’s loss aversion on his effort is investigated based on the contract. After characterizing the retailer’s optimal solutions, this paper demonstrates that contrary to intuition, loss aversion weakens incentives for retailer’s sales effort and the retailer’s optimal effort decreases as the loss aversion increases.