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Optimal revenue-sharing contract based on forecasting effort for uncertain agency problem

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Abstract

This paper discusses an optimal contracting problem between a principal and an agent by establishing an uncertain agency model. Compared with the existing work, this research focuses on the risk cost caused by the wrong investment in a task based on an inaccurate assessment about the potential output. To avoid it, the principal authorizes the professional agent to make a more accurate assessment about the output in the light of his professional knowledge and experience, and then to show the principal the optimal amount invested in the task. Meanwhile, as an incentive for the agent to pay great forecasting effort to make the more accurate assessment about the output, the principal provides the agent with a revenue-sharing contract including a sharing ratio for him. On this view, this paper proposes the optimal revenue-sharing contract that provides guidance for the two participators to make their respective optimal decisions. Furthermore, the proposed work is supported with the numerical results by analyzing the evolutions of the optimal contract under various influencing factors.

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Acknowledgment

This work is partially supported by the National Natural Science Foundation of China under Grant No. 71271151 and No. 71301114, and the Specialized Research Fund for the Doctoral Program of Higher Education under Grant No. 20130032110015.

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Authors and Affiliations

  1. Institute of Systems Engineering, Tianjin University, Tianjin, 300072, China

    Xiaoli Wu & Yanfei Lan

  2. College of Mathematics and Information Technology, Xingtai University, Xingtai, 054001, China

    Haitao Liu

Authors
  1. Xiaoli Wu
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  2. Yanfei Lan
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  3. Haitao Liu
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Correspondence to Yanfei Lan.

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Wu, X., Lan, Y. & Liu, H. Optimal revenue-sharing contract based on forecasting effort for uncertain agency problem. Int. J. Mach. Learn. & Cyber. 5, 971–979 (2014). https://doi.org/10.1007/s13042-014-0243-3

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  • DOI: https://doi.org/10.1007/s13042-014-0243-3

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