Journal
CENTRAL EUROPEAN JOURNAL OF OPERATIONS RESEARCH
Volume 18, Issue 4, Pages 491-509Publisher
SPRINGER
DOI: 10.1007/s10100-010-0172-5
Keywords
Differential game; Principal-agent model; Feedback strategies; Stackelberg equilibrium
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We consider situations in which a principal tries to induce an agent to spend effort on accumulating a state variable that affects the well-being of both parties. The only incentive mechanism that the principal can use is a state-dependent transfer of her own utility to the agent. Formally, the model is a Stackelberg differential game in which the players use feedback strategies. Whereas in general Stackelberg differential games with feedback strategy spaces the leader's optimization problem has non-standard features that make it extremely hard to solve, in the present case this problem can be rewritten as a standard optimal control problem. A linear-quadratic example is used to illustrate our approach.
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