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

Yasuaki Wasa, Ken-Ichi Akao and Kenko Uchida
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Yasuaki Wasa: Department of Electrical Engineering and Bioscience, Waseda University, Tokyo 169-8555, Japan.
Kenko Uchida: Research Institute for Science and Engineering, Waseda University, Tokyo 169-8555, Japan.

RIEEM Discussion Paper Series from Research Institute for Environmental Economics and Management, Waseda University

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.

Keywords: Principal-agent problems; Moral hazard; Cyber-physical systems; Multi-agent systems; Dynamic programming; Risk-sensitive stochastic control; Differential games (search for similar items in EconPapers)
JEL-codes: C61 C73 D82 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2020-02
New Economics Papers: this item is included in nep-cta, nep-mic and nep-ore
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