Designing Resilient Partnerships: Optimal Contract with Dual Incentive Structure in Uncertain Markets

Partnerships represent strategic alliances where two or more entities collaborate by pooling resources to achieve mutual economic benefits. However, the uncertainty surrounding the return on investment (ROI) poses significant challenges in designing optimal partnership contracts. This paper develops a game-theoretic model to structure partnership contracts under uncertain ROI, where the final investment outcome is stochastic and ex-ante unknown to both partners. The model analyzes the contract design from one partner’s perspective, considering the possibility that the other partner may face future market shocks that could affect its ability to honor its commitments to the partnership. We characterize the equilibrium of the game and propose strategies that the primary partner can adopt to mitigate risks and safeguard its interests. The findings provide insights into how strategic contract design can enhance the stability, cooperation, and efficiency of partnerships operating under uncertain market conditions.