Optimal Incentive Contract for Sales Team with Loss Aversion Preference

Abstract

When manufacturing enterprises employ sales team (or multiple salesmen) to sell products, there is asymmetric information such as the ability and efforts salesmen. Enterprises can use contracts to incentivize salesmen to work hard to maximize their profits. Assuming that market demand is sensitive to effort, and the salesman can exploit the market by increasing effort, a multi-agent model is established for the case of symmetrical information and asymmetrical information, in which the sales team has a loss aversion preference. In this multi-agent model, the agents’ utility function is non-concave and cannot be solved by traditional methods. We use a backward stochastic differential equation (BSDE) to represent agents’ contract through the martingale representation theorem and use the stochastic optimal control and matrix method to obtain the explicit solution of the optimal contract. Based on the conclusions of the research, an empirical analysis is made on the sales team of an enterprise.

Keywords

• sales team
• information symmetry
• moral hazard
• loss aversion
• BSDE
• HJB equation