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Salesforce incentives: Matching supply and demand under information asymmetry

Wenqiang Xiao, 2007
Faculty Advisor: Fangruo Chen
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Abstract

Many firms rely on sales agents (e.g., their internal salespeople or supply chain parties) to sell their products. The contractual relationship between the firm and the sales agents is subject to the moral hazard and adverse selection problem. The former is mainly caused by the fact that the agents' sales efforts are often unobservable to the firm, while the latter arises because the agents typically have better information about the market demand due to their close contact with the consumers. The truthful information sharing is beneficial for the firm at least for two reasons. First, the conveyed information about the market uncertainty enables the firm to better tailor the compensation to the agents' exerted sales efforts, thereby alleviating the moral hazard problem. Second, the information can be used to better match supply and demand. Thus, the design of efficient contracts to elicit information from the sales agents is an important strategic issue for the firm. The main objective of this thesis is to examine the performance of several incentive contracts that have been used in practice. In doing so, the thesis studies in sequel three different models each of which captures a specific sales environment: the first model considers a multi-agent sales environment; the second model explores the setting where it is costly for the sales agent to acquire information and therefore the information asymmetry is set to be endogenous instead of being exogenous as in many standard adverse selection models; the third model views the sales agent as an outside supply chain member (e.g., the retailer or dealer), who not only exerts sales efforts but also bears the entire inventory risk.

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