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Chinese Journal of Management Science ›› 2021, Vol. 29 ›› Issue (5): 138-146.doi: 10.16381/j.cnki.issn1003-207x.2018.1658

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Optimal Contract for the Agency Problem Considering Agent's Uncertain Effort in Reducing Project Duration

MA Jun-yang1,2, HUANG Xiao-xia1, FU Ying-shi3, ZHOU Xiao-guang1   

  1. 1. School of Economics and Management, University of Science and Technology Beijing, Beijing 100083, China;
    2. National University of Defense Technology, Changsha 410073, China;
    3. College of Management and Economics, Tianjin University, Tianjin 300072, China
  • Received:2018-11-20 Revised:2019-01-23 Online:2021-05-20 Published:2021-05-26

Abstract: Agency problem occurs when the principal authorizes an agent for a specific project. In many industries, principal can earn higher return if the project is completed earlier. Since there is some asymmetric information between the two participators, principal cannot know how much effort that agent invests to accelerate completion of the project. The existence of asymmetric information may result in less agent's effort which delays the expected project duration. This is because conflict exists between principal and agent and agent may act on his own interests instead of principal's return. From principal's perspective, he wishes that the agent will exert his effort to shorten the project duration to gain more profit. Besides, due to complexity of the market, in many cases project returns can hardly be predicted exactly by the principal in advance. This paper focuses on analyzing how to design an optimal contract for principal to stimulate the agent to expedite the project completion. Most previous researches used random variables to determine project parameters and the agent's effort in project agency problems. However, in some cases, the project parameters and the agent's effort cannot be obtained by the historical data and have to be estimated by experts. In this paper, uncertain variables are used to describe the experts' estimations of these parameters and the use of them is justified. By applying the uncertainty theory, an optimal contract for the agency problem considering the agent's uncertain effort in reducing project duration is proposed. After that, the deterministic form of the model is given for solving the problem. Furthermore, the optimal contract considering the agent's uncertain effort is compared with that without considering the agent's uncertain effort. It is concluded that when everything else is same, the expected return of optimal contract is not less than that without considering the agent's uncertain effort. Finally, an example is presented to illustrate the application of the proposed model.

Key words: agency, optimal contract, uncertainty theory, agent's uncertain effort, project duration

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