Supplier-retailer contracting under asymmetric risk attitude information in supply chain

The problem of designing an optimal returns policy for the supplier when the retailer is risk-aversion and the risk aversion level is its private information is studied. Allowing for the asymmetric information, this paper uses principal-agent models to derive the supplier's optimal mechanism and compare it to the situation where the supplier has complete information. It shows that the presence of both the risk aversion and the information asymmetries combined destroys the coordination of the supply chain, leading to inefficient supply chain performance. The total profits and the supplier's profits are lowered while the retailer's utilities are improved.