2015/06/17 by Christopher W. Miller, Miller, Christopher W., Insoon Yang +1
Business, Management and Accounting · Decision Sciences · Economics, Econometrics and Finance · #Auction Theory and Applications #Economic theories and models #FOS: Economics and business #FOS: Electrical engineering #FOS: Mathematics #General Economics (econ.GN) #Optimization and Control (math.OC) #Supply Chain and Inventory Management #Systems and Control (eess.SY) #electronic engineering #information engineering
paper · pdf · doi:10.48550/arxiv.1506.05497
openalex publication_date 2015/06/17 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We present a continuous-time contract whereby a top-level player can\nincentivize a hierarchy of players below him to act in his best interest\ndespite only observing the output of his direct subordinate. This paper extends\nSannikov's approach from a situation of asymmetric information between a\nprincipal and an agent to one of hierarchical information between several\nplayers. We develop an iterative algorithm for constructing an incentive\ncompatible contract and define the correct notion of concavity which must be\npreserved during iteration. We identify conditions under which a dynamic\nprogramming construction of an optimal dynamic contract can be reduced to only\na one-dimensional state space and one-dimensional control set, independent of\nthe size of the hierarchy. In this sense, our results contribute to the\napplicability of dynamic programming on dynamic contracts for a large-scale\nprincipal-agent hierarchy.\n