Principal-Agent Theory Based Risk Allocation Model for Virtual Enterprise (Report‪)‬

1. Introduction Virtual Enterprise (VE) is a dynamic alliance composed of independent individual enterprises which locate in different area. It's designed to adapt to rapidly changing market opportunities, so as to achieve the sharing of skills, core competencies and resources [1,2]. Based on this concept, on one hand, member enterprises in a VE, which are geographically distributed, keep their independence and autonomy. On the other hand, they provide their own core competencies in different areas such as marketing, engineering and manufacturing to the VE. When new market requirements arise and individual enterprises do not have all necessary skills and competencies to undertake these requirements independently, by combining specific expertise of other enterprises, it is possible to create a VE which is capable of responding to the new requirements. In a certain sense, the essence of VE has its basis in an early and fundamental concept of economics, namely, the division of labor, which has its origin in the classics, namely, the wealth of nations, by Adam Smith first published in 1776.