Efficient Resource Allocation Contracts to Reduce Adverse Events

Yong Liang (), Peng Sun (), Runyu Tang () and Chong Zhang ()
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Yong Liang: Research Center for Contemporary Management, Key Research Institute of Humanities and Social Sciences at Universities, School of Economics and Management, Tsinghua University, Beijing 10084, China
Peng Sun: Fuqua School of Business, Duke University, Durham, North Carolina 27708
Runyu Tang: School of Management, Xi’an Jiaotong University, Xi’an, Shaanxi 710049, China
Chong Zhang: Department of Management, Tilburg University, 5037 AB Tilburg, Netherlands

Operations Research, 2023, vol. 71, issue 5, 1889-1907

Abstract: Motivated by the allocation of online visits to product, service, and content suppliers in the platform economy, we consider a dynamic contract design problem in which a principal constantly determines the allocation of a resource (online visits) to multiple agents. Although agents are capable of running the business, they introduce adverse events, the frequency of which depends on each agent’s effort level. We study continuous-time dynamic contracts that utilize resource allocation and monetary transfers to induce agents to exert effort and reduce the arrival rate of adverse events. In contrast to the single-agent case, in which efficiency is not achievable, we show that efficient and incentive-compatible contracts, which allocate all resources and induce agents to exert constant effort, generally exist with two or more agents. We devise an iterative algorithm that characterizes and calculates such contracts, and we specify the profit-maximizing contract for the principal. Furthermore, we provide efficient and incentive-compatible dynamic contracts that can be expressed in closed form and are therefore easy to understand and implement in practice.

Keywords: Decision Analysis; dynamic contract design; moral hazard; self-generating set; platform economy; stochastic optimal control (search for similar items in EconPapers)
Date: 2023
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