In a decentralized supply chain, there are many decision makers who mainly care about achieving their own goals. This results in lower-than-optimal profits for the whole system. Hence, it is important to coordinate supply chains by aligning channel members’ incentives. There exists a rich body of literatures on the analytical design of different types of contracts that can be used for channel coordination. Buyback and revenue sharing contracts are two most common types of contract that can coordinate the supply chain. While most of the prior theories rest on the assumption that the decision makers are rational profit maximizing, recent observations in experimental studies and real-life settings have proved that the decision makers are indeed subject to different behavioral effects. By conducting a controlled laboratory experiment, this study found that subjects make decisions that are consistent with loss aversion. Loss aversion makes subjects order less than the optimal order quantities under buyback and revenue sharing contracts. Additionally, loss aversion leads to the difference in performance of buyback and revenue sharing contracts. Findings from this study suggest that contract designers need to consider the behavioral effects to achieve channel coordination in supply chain setting.

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