Computing an Optimal Contract in Simple Technologies
AbstractWe study an economic setting in which a principal motivates a team of strategic agents to exert costly effort toward the success of a joint project. The action taken by each agent is hidden and affects the (binary) outcome of the agent's individual task stochastically. A Boolean function, called technology, maps the individual tasks' outcomes into the outcome of the whole project. The principal induces a Nash equilibrium on the agents' actions through payments that are conditioned on the project's outcome (rather than the agents' actual actions) and the main challenge is that of determining the Nash equilibrium that maximizes the principal's net utility, referred to as the optimal contract. Babaioff, Feldman and Nisan  suggest and study a basic combinatorial agency model for this setting. Here, we concentrate mainly on two extreme cases: the AND and OR technologies. Our analysis of the OR technology resolves an open question and disproves a conjecture raised in . In particular, we show that while the AND case admits a polynomial-time algorithm, computing the optimal contract in the OR case is NP-hard. On the positive side, we devise an FPTAS for the OR case, which also sheds some light on optimal contract approximation of general technologies.
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Bibliographic InfoPaper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp452.
Length: 23 pages
Date of creation: May 2007
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-26 (All new papers)
- NEP-BEC-2007-05-26 (Business Economics)
- NEP-CMP-2007-05-26 (Computational Economics)
- NEP-ICT-2007-05-26 (Information & Communication Technologies)
- NEP-PPM-2007-05-26 (Project, Program & Portfolio Management)
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