IDEAS home Printed from https://ideas.repec.org/p/was/dpaper/2001.html
   My bibliography  Save this paper

Optimal Dynamic Incentive Contracts between a Principal and Multiple Agents in Controlled Markov Processes: A Constructive Approach

Author

Listed:
  • Yasuaki Wasa

    (Department of Electrical Engineering and Bioscience, Waseda University, Tokyo 169-8555, Japan.)

  • Ken-Ichi Akao

    (Graduate School of Social Sciences, Waseda University, Tokyo 169-8050, Japan.)

  • Kenko Uchida

    (Research Institute for Science and Engineering, Waseda University, Tokyo 169-8555, Japan.)

Abstract

This paper investigates an optimal dynamic incentive contract between a risk-averse principal (system operator) and multiple risk-averse agents (subsystems) with independently local controllers in continuous-time controlled Markov processes, which can represent various cyber-physical systems. The principal fs incentive design and the agents f decision-makings under asymmetric information structure are known as the principal-agent (PA) problems in economic field. However, the standard framework in economics cannot be directly applied to the realistic control systems including large-scale cyber-physical systems and complex networked systems due to some unrealistic assumptions for an engineering perspective. In this paper, using a constructive approach based on the techniques of the classical stochastic control theory, we propose and solve a novel dynamic control/incentive synthesis for the PA problem under moral hazard.

Suggested Citation

  • Yasuaki Wasa & Ken-Ichi Akao & Kenko Uchida, 2020. "Optimal Dynamic Incentive Contracts between a Principal and Multiple Agents in Controlled Markov Processes: A Constructive Approach," RIEEM Discussion Paper Series 2001, Research Institute for Environmental Economics and Management, Waseda University.
    • Handle: RePEc:was:dpaper:2001
    as

    Download full text from publisher

    File URL: http://www.waseda.jp/prj-rieem/dp/dp2001.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hyeng Keun Koo & Gyoocheol Shim & Jaeyoung Sung, 2008. "Optimal Multi‐Agent Performance Measures For Team Contracts," Mathematical Finance, Wiley Blackwell, vol. 18(4), pages 649-667, October.
    2. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    3. Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 957-984.
    4. Schattler, Heinz & Sung, Jaeyoung, 1997. "On optimal sharing rules in discrete-and continuous-time principal-agent problems with exponential utility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 551-574.
    5. Jakša Cvitanić & Dylan Possamaï & Nizar Touzi, 2018. "Dynamic programming approach to principal–agent problems," Finance and Stochastics, Springer, vol. 22(1), pages 1-37, January.
    6. Romuald Elie & Dylan Possamai, 2016. "Contracting theory with competitive interacting agents," Papers 1605.08099, arXiv.org.
    7. Williams, Noah, 2015. "A solvable continuous time dynamic principal–agent model," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 989-1015.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Emma Hubert, 2020. "Continuous-time incentives in hierarchies," Papers 2007.10758, arXiv.org.
    2. Romuald Elie & Thibaut Mastrolia & Dylan Possamaï, 2019. "A Tale of a Principal and Many, Many Agents," Mathematics of Operations Research, INFORMS, vol. 44(2), pages 440-467, May.
    3. Qi Luo & Romesh Saigal, 2020. "Dynamic Multiagent Incentive Contracts: Existence, Uniqueness, and Implementation," Mathematics, MDPI, vol. 9(1), pages 1-17, December.
    4. Romuald Elie & Dylan Possamai, 2016. "Contracting theory with competitive interacting agents," Papers 1605.08099, arXiv.org.
    5. Jessica Martin & Stéphane Villeneuve, 2021. "A Class of Explicit optimal contracts in the face of shutdown," Working Papers hal-03124102, HAL.
    6. Kaitong Hu & Zhenjie Ren & Junjian Yang, 2019. "Principal-agent problem with multiple principals," Working Papers hal-02088486, HAL.
    7. Jakv{s}a Cvitani'c & Dylan Possamai & Nizar Touzi, 2015. "Dynamic programming approach to principal-agent problems," Papers 1510.07111, arXiv.org, revised Jan 2017.
    8. Jessica Martin & Stéphane Villeneuve, 2023. "Risk-sharing and optimal contracts with large exogenous risks," Post-Print hal-04164688, HAL.
    9. Martin, Jessica & Villeneuve, Stéphane, 2021. "A Class of Explicit optimal contracts in the face of shutdown," TSE Working Papers 21-1183, Toulouse School of Economics (TSE), revised Apr 2022.
    10. Barlo, Mehmet & Özdog˜an, Ayça, 2014. "Optimality of linearity with collusion and renegotiation," Mathematical Social Sciences, Elsevier, vol. 71(C), pages 46-52.
    11. Romuald Elie & Emma Hubert & Thibaut Mastrolia & Dylan Possamai, 2019. "Mean-field moral hazard for optimal energy demand response management," Papers 1902.10405, arXiv.org, revised Mar 2020.
    12. Jessica Martin & Stéphane Villeneuve, 2023. "Risk-sharing and optimal contracts with large exogenous risks," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 46(1), pages 1-43, June.
    13. Jessica Martin & St'ephane Villeneuve, 2021. "A Class of Explicit optimal contracts in the face of shutdown," Papers 2102.00001, arXiv.org.
    14. Camilo Hern'andez & Dylan Possamai, 2023. "Time-inconsistent contract theory," Papers 2303.01601, arXiv.org.
    15. Jakša Cvitanić & Dylan Possamaï & Nizar Touzi, 2018. "Dynamic programming approach to principal–agent problems," Finance and Stochastics, Springer, vol. 22(1), pages 1-37, January.
    16. Thibaut Mastrolia & Dylan Possamai, 2015. "Moral hazard under ambiguity," Papers 1511.03616, arXiv.org, revised Oct 2016.
    17. Chong Lai & Rui Li & Yonghong Wu, 2020. "Optimal compensation and investment affected by firm size and time-varying external factors," Annals of Finance, Springer, vol. 16(3), pages 407-422, September.
    18. Kerem Ugurlu, 2018. "Dynamic optimal contract under parameter uncertainty with risk averse agent and principal," Papers 1806.01495, arXiv.org.
    19. Qi Luo & Romesh Saigal, 2017. "A Note on the Multi-Agent Contracts in Continuous Time," Papers 1710.00377, arXiv.org, revised Oct 2017.
    20. Emma Hubert & Thibaut Mastrolia & Dylan Possamai & Xavier Warin, 2020. "Incentives, lockdown, and testing: from Thucydides's analysis to the COVID-19 pandemic," Papers 2009.00484, arXiv.org, revised Apr 2022.

    More about this item

    Keywords

    Principal-agent problems; Moral hazard; Cyber-physical systems; Multi-agent systems; Dynamic programming; Risk-sensitive stochastic control; Differential games;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:was:dpaper:2001. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Takuro Miyamoto (email available below). General contact details of provider: http://www.waseda.jp/prj-rieem/en .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.