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Principal/Two-Agent model with internal signal

Andreja Smole (), Timotej Jagrič () and Drago Bokal ()
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Andreja Smole: Cosylab
Timotej Jagrič: University of Maribor
Drago Bokal: University of Maribor

Central European Journal of Operations Research, 2021, vol. 29, issue 3, No 2, 808 pages

Abstract: Abstract Our novel game-theoretic Principal/Two-Agent model ensures that the Principal has a reliable internal signal about the Agents’ invested work and effort. Analysing the dominant strategies deductively proves that suboptimal results cannot be prevented with focus on evaluation, implying that quality of work, not its evaluation, must be considered as the most important outcome of the process. The objective of the paper is to establish a new game theoretic model that can be used as a tool for policy makers and managers to motivate Agents and ensure high quality results. Additionally, the model can be used to determine the awards in a company bonus system. The newly developed model is an extended Principal-Agent model with an internal game between two Agents, whose payoff structure can be set in order to ensure truthful implementation of the internal signal to the Principal. By analysing the dominant strategies, we determined the conditions that ensure each Nash equilibrium of the game to manifest the desired outcome. The model presents a novel approach to alignment of interests, for example, in economy, social problems (e.g. policy making for educational process), management, project management, and the mentor-apprentice relationship.

Keywords: Game theory; Nash equilibrium; Moral hazard; Principal-Agent model; Internal signal; 91A40: Game-theoretic models; 91A05: 2-person games; 91A12: Cooperative games; 91A15: Stochastic games (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10100-020-00719-0

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