Design of environmentally conscious incentive contracts for logistics services

There are two major hurdles, economy of scale and incentives for practice, in logistics service for environmentally friendly operations. This paper models and designs the incentive contracts between a company with environmental commitment and its logistics service provider. The company aims to encourage the logistic service provider to devote effort on environmental concerns. It is generally believed that such effort implies costly burden to the service provider but benefits the company. We consider different information structures in our models and show the corresponding contract forms. The research starts with investigating the contract form with symmetric information and known effort of the provider. Through single-period and multiple-period models, it is found that long run cooperation can benefit both parties. We then extend the model to a case where the effort of the provider is unobservable and unverifiable. It is found that with proper incentive compatible constraint, the provider will make the effort as expected. In addition, the optimal incentive contracts not only motivate the logistics service provider to make the expected effort on environmentally friendly operations, but it also acts as a risk sharing tool.