Recent Studies on Incentive Design Problems in Game Theory and Management Science

Abstract

We study a simple principal-agent game and show how the linear wage contract can be obtained by a three-phase adjustment process. The first two processes result in an incentive compatible Pareto optimal outcome and the third process takes care of the agent's individual rationality. We also discuss a negotiation process to achieve this outcome and give the wage contract an interpretation in terms of incentive equilibrium. This concept has recently been an active research topic in dynamic games and management science studies. In this paper we present a new method for computing incentive Stackelberg solutions. The method is based on solving a system of nonlinear equations by using standard iterative schemes such as fixedpoint iteration or Broyden's method. The method can be implemented in the case of incomplete information because the leader does not need to know the followers' reaction function. The use of the method is shown in two examples: in a two player quadratic case and in a duopoly model with government coordination. More general problems and convergence properties of the method are discussed