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A Study on Project Duration Incentives in a Retail Apparel Franchise

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  • Yichen Peng

    (School of Business Administration, Nanjing University of Finance & Economics, Nanjing 210046, China
    School of Management and Engineering, Nanjing University, Nanjing 210093, China)

  • Jing Zhou

    (School of Management and Engineering, Nanjing University, Nanjing 210093, China)

  • Xiaoling Wu

    (School of Management and Engineering, Nanjing University, Nanjing 210093, China
    School of Economics and Management, Nanjing Tech University, Nanjing 210009, China)

Abstract

This paper studies the impact on project duration of different forms of over-confidence among general contractors executing such projects, in the context of retail apparel franchises. It goes on to consider the design of relevant incentives and, in particular, a compensation mechanism included in the initial contract that covers the event of contractor dismissal. This mechanism is examined as a means of hedging risk arising from the behavior of the principal. This includes a study of a two-way risk avoidance strategy, which is intended to make up for a shortfall in this regard in the existing literature. Outcomes derived from this research include the conclusion that different levels of confidence can have various impacts on optimal incentive coefficients and the effort level extracted from agents, thereby affecting the ultimate configuration of an optimal contract. Introducing a compensation mechanism covering the event of dismissal can serve to diminish the risk of an agent breaching their contract. This paper applies the concept of bounded rationality to a principal-agent model, ensuring conclusions that are attuned to reality.

Suggested Citation

  • Yichen Peng & Jing Zhou & Xiaoling Wu, 2015. "A Study on Project Duration Incentives in a Retail Apparel Franchise," Sustainability, MDPI, vol. 7(2), pages 1-16, February.
    • Handle: RePEc:gam:jsusta:v:7:y:2015:i:2:p:2145-2160:d:45943
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    References listed on IDEAS

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    1. Shtub, Avraham & LeBlanc, Larry J. & Cai, Ziyong, 1996. "Scheduling programs with repetitive projects: A comparison of a simulated annealing, a genetic and a pair-wise swap algorithm," European Journal of Operational Research, Elsevier, vol. 88(1), pages 124-138, January.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Mrinal Ghosh & George John, 2000. "Experimental Evidence for Agency Models of Salesforce Compensation," Marketing Science, INFORMS, vol. 19(4), pages 348-365, August.
    4. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
    5. Etgar, Ran & Shtub, Avraham & LeBlanc, Larry J., 1997. "Scheduling projects to maximize net present value -- the case of time-dependent, contingent cash flows," European Journal of Operational Research, Elsevier, vol. 96(1), pages 90-96, January.
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    Cited by:

    1. Tsan-Ming Choi & Yongjian Li, 2015. "Sustainability in Fashion Business Operations," Sustainability, MDPI, vol. 7(11), pages 1-7, November.
    2. Yue Chen & Sai-Ho Chung & Shu Guo, 2020. "Franchising contracts in fashion supply chain operations: models, practices, and real case study," Annals of Operations Research, Springer, vol. 291(1), pages 83-128, August.

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