Advantages of Strategic Thinking in Multiagent Contracts (A Mechanism and Analysis)

Sunju Park, Edmund H. Durfee and William P. Birmingham, University of Michigan, USA

Forming a contract among self-interested agents often requires complex, strategic thinking. For instance, a self-interested agent (contractee) will perform a task of another agent (contractor) only when doing it is its own interest, and therefore to form a successful contract, the contractor needs to provide incentives to the contractee, such as proposing a payment higher than the contractee’s cost of doing the task. In this paper, we focus on the contractor’s strategic decision problem of what payment to offer to maximize its expected utility, and propose a method for a self-interested contractor to determine the best payment to offer. We present a four-step decision-making mechanism using a stochastic Markov-process (MP) model, which captures various factors that influence the utility value and uncertainties associated with them. The MP-based mechanism enables a contractor to choose different optimal payments depending on the payment(s) of the other contractor(s) or the contractees’ costs of doing the task, and therefore to receive a better profit. The experiment demonstrates strategic thinking-thinking about not only oneself but also the contractees and the other competing contractors-is indeed advantageous.

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