Study on revenue sharing contract in virtual enterprises

Abstract

Member enterprises engaged in a virtual enterprise are prone to shirk both productive efforts and risks because their efforts are unobservable to any other member enterprises. How to design a revenue sharing contract to prevent the member enterprises from free riding is one of the most important issues to be considered to cut down risks that virtual enterprises may meet. Based on the work of profit sharing in partnerships and the research on revenue sharing in supply chains and joint ventures, we propose a model of the revenue sharing contract aimed at coordinating a virtual enterprise composed of n risk-averse member enterprises where every member enterprise performs different tasks and contributes distinct core resources. We characterize the optimal productive efforts, risk-taken and incentive intensity in the revenue sharing contract, and indicate that improving the evaluation precision of productive efforts and selecting weakly risk-averse member enterprises with close power are the key factors to the success of VEs.

Keywords

Virtual enterprise / revenue sharing / productive effort / risk aversion / incentive intensity

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