Efficient Resource Allocation Contracts to Reduce Adverse Events
Yong Liang, Peng Sun, Runyu Tang, Chong Zhang
Operations Research · 2023 · Volume 71 · Issue 5
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. Funding: Y. Liang acknowledges support from the National Key R&D Program of China [Grant 2020AAA0103801] and the National Natural Science Foundation of China [Grant 71872095]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/opre.2022.2322 .
Keywords
Decision Analysis, dynamic contract design, moral hazard, self-generating set, platform economy, stochastic optimal control
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