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Article: Punish Underperformance with Suspension: Optimal Dynamic Contracts in the Presence of Switching Cost
Title | Punish Underperformance with Suspension: Optimal Dynamic Contracts in the Presence of Switching Cost |
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Authors | |
Issue Date | 27-Jun-2023 |
Publisher | Institute for Operations Research and Management Sciences |
Citation | Management Science, 2023 How to Cite? |
Abstract | This paper studies a dynamic principal–agent setting in which the principal needs to dynamically schedule an agent to work or be suspended. When the agent is directed to work and exert effort, the arrival rate of a Poisson process is increased, which increases the principal’s payoff. Suspension, on the other hand, serves as a threat to the agent by delaying future payments. A key feature of our setting is a switching cost whenever the suspension stops and the work starts again. We formulate the problem as an optimal control model with switching and fully characterize the optimal control policies/contract structures under different parameter settings. Our analysis shows that, when the switching cost is not too high, the optimal contract demonstrates a generalized control-band structure. The length of each suspension episode, on the other hand, is fixed. Overall, the optimal contract is easy to describe, compute, and implement. |
Persistent Identifier | http://hdl.handle.net/10722/331005 |
ISSN | 2023 Impact Factor: 4.6 2023 SCImago Journal Rankings: 5.438 |
DC Field | Value | Language |
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dc.contributor.author | Cao, Ping | - |
dc.contributor.author | Sun, Peng | - |
dc.contributor.author | Tian, Feng | - |
dc.date.accessioned | 2023-09-21T06:51:55Z | - |
dc.date.available | 2023-09-21T06:51:55Z | - |
dc.date.issued | 2023-06-27 | - |
dc.identifier.citation | Management Science, 2023 | - |
dc.identifier.issn | 0025-1909 | - |
dc.identifier.uri | http://hdl.handle.net/10722/331005 | - |
dc.description.abstract | <p>This paper studies a dynamic principal–agent setting in which the principal needs to dynamically schedule an agent to work or be suspended. When the agent is directed to work and exert effort, the arrival rate of a Poisson process is increased, which increases the principal’s payoff. Suspension, on the other hand, serves as a threat to the agent by delaying future payments. A key feature of our setting is a switching cost whenever the suspension stops and the work starts again. We formulate the problem as an optimal control model with switching and fully characterize the optimal control policies/contract structures under different parameter settings. Our analysis shows that, when the switching cost is not too high, the optimal contract demonstrates a generalized control-band structure. The length of each suspension episode, on the other hand, is fixed. Overall, the optimal contract is easy to describe, compute, and implement.<br></p> | - |
dc.language | eng | - |
dc.publisher | Institute for Operations Research and Management Sciences | - |
dc.relation.ispartof | Management Science | - |
dc.title | Punish Underperformance with Suspension: Optimal Dynamic Contracts in the Presence of Switching Cost | - |
dc.type | Article | - |
dc.identifier.doi | 10.1287/mnsc.2023.4845 | - |
dc.identifier.eissn | 1526-5501 | - |
dc.identifier.issnl | 0025-1909 | - |