Incentive Mechanism to Prevent Moral Hazards in VMI

This text analyzes the moral hazard problem and the reasons leading to it in VMI, then establishes the incentive mechanism model between the supplier and the retailer using the Principal-agent Theory in the supposition that the supplier is risk-neutral and the retailer is risk-averse. At last the incentive mechanism model shows the value of the incentive compensation coefficient provided by the supplier and the effort level of the retailer, which could prevent moral hazards in VMI effectively.