Computing an Optimal Contract in Simple Technologies

Yuval Emek () and Michal Feldman ()

Discussion Paper Series from Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem

Abstract: We 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 [1] 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 [1]. 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.

New Economics Papers: this item is included in nep-bec, nep-cmp, nep-ict and nep-ppm
Date: 2007-05
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