Supply chain interactions can partly be described by Agency Theory. Yet according to Salanié (2003), Agency Theory has still not received enough empirical validation. We propose a validation in supply chain context. Although we do not enter into psychological or social reasons for partnering, we included subjective probability introduced by Kahnneman and Tversky in their seminal paper in Econometrica (1979), which led to evolution of Prospect Theory. Using Prospect theory’s Value functions in classical derivation of the optimal contract, we derive the analytical form of the Lagrange multiplier (shadow price) which we then test and empirically derive the value of this multiplier in a large scale supply chain survey.

Economics