Optimal Contract to Induce Continued Effort

3/16/2017 | 4:15pm | E51-335
Reception to follow.





Peng Sun

Duke University

Abstract: We consider a basic model of a risk neutral principal incentivizing a risk neutral agent to exert effort in order to raise the arrival rate of a Poisson process. The effort is costly to the agent, unobservable to the principal, and affects the instantaneous arrival rate. Each arrival yields a constant revenue to the principal. The principal, therefore, devises a mechanism involving payments and a potential stopping time in order to motivate the agent to always exert effort. We formulate this problem as a stochastic optimal control model with incentive constraint in continuous time over an infinite horizon. Although we allow payments to take general forms contingent upon past arrival times, the optimal contract has a simple and intuitive structure, which depends on whether the agent is as patient as or less patient than the principal towards future income.

This is joint work with Feng Tian.

Bio: Peng Sun is a Professor in the Decision Sciences area at the Fuqua School of Business, Duke University. He researches mathematical theories and models for resource allocation decisions under uncertainty, and incentive issues in dynamic environments. His work spans a range of applications areas, from operations management, economics, finance, marketing, to health care and sustainability. He serves an Associate Editor at Operations Research, and an Associate Editor at Management Science. At the Fuqua School, Professor Sun has taught MBA core course Decision Models and elective course Strategic Modeling and Business Dynamics, and PhD course Dynamic Programming and Optimal Control.

Event Time: 

2017 - 16:15