In the classical principal-agent setting, the principal delegates some task to the agent, who receives a payment conditioned on the outcome of the task, which in turn benefits the principal. To align their objectives, the principal designs a contract that incentivizes the agent to take actions beneficial to the principal. In practice, however, the agent may act under misspecified beliefs about the underlying environment, leading to systematically suboptimal decisions. In this work, we study this problem through a principal-agent Markov Decision Process (PAMDP), in which the principal repeatedly interacts with an agent whose transition model may differ from the true environment dynamics. The principal has access to the true transition model and designs contracts that account for the agent's belief and incentives. We characterize contract design under model mismatch and develop a framework that enables the principal to induce desirable long-term benefits even though the agent has a potentially inaccurate understanding of the environment.
Figures & tables
Figure 1: PAMDP setting under model mismatch
Figure 2: Comparison of optimal solutions under the same and different beliefs
Figure 3: Comparison of different model sets containing the agent’s transition model μA for H=3
Figure 4: Comparison of different model sets containing the agent’s transition model μA for H=1
Figure 5: Comparison of different model sets that do not contain the agent’s transition model μA for H=3
We consider the dynamic principal-agent problem under asymmetric information, wherein a principal sequentially designs contracts to incentivize an agent with unknown preferences and hidden actions. A fundamental bottleneck in the existing literature is the assumption of deterministic agent utility, which renders the principal's expected utility discontinuous and forces computationally intractable discretizations of the contract space. In this paper, we address this limitation by introducing a stochastic counterpart into the agent's utility model, capturing the inherent physical and behavioral variations in realistic subsystems. We formally prove that this stochastic formulation restores the continuity of the principal's expected utility. Leveraging this continuous geometric structure, we formulate the interaction as a structured multi-armed bandit problem subject to heteroscedastic noise. We propose a Heteroscedastic GP-UCB algorithm that utilizes a Neural Network (Arcsin) kernel, chosen to capture the non-stationary, sigmoidal geometry of the utility landscape. For an m-dimensional compact contract space, we establish a high-probability cumulative regret bound of O(T(logT)m+1). Finally, we demonstrate the practical efficacy of our theoretical framework by formulating the Vehicle-to-Grid (V2G) incentive design problem, proving its equivalence to a dynamic principal-agent problem, and showing superior economic performance for grid aggregators.
Arghya Mallick, Anuj S. Vora, Sergio Grammatico +1
Delft Center for Systems and Control, Delft University of Technology, Delft, The Netherlands · Jio Institute, Navi Mumbai, India · University of Toronto, Toronto, Canada
We study the consequences of information asymmetries and misaligned incentives in settings with multiple independent agents. We model an interaction between a Sender, who holds vital private information but cannot act, and a Receiver, who must make decisions but is dependent on the Sender's information. We find that the Sender learns an optimal communication strategy that the Receiver reliably acts on. Importantly, this strategy is highly sensitive to the degree of conflict in the agents' rewards and the amount of environmental information the Receiver can already observe. We introduce a mechanism allowing the agents to form linear contracts, where a price is established for the information. We demonstrate that the Sender learns to use these payment structures to improve its rewards, though this comes at a cost of "fairness" between agents as the Sender is able to extract much of the Receiver's surplus. This raises questions about fairness, contract design, and learning in the context of multi-agent systems.
We study repeated contract design when a principal observes outcomes but not the actions that generate them. The principal may use any bounded outcome-contingent payment vector, and the agent's best response can make expected profit discontinuous in those payments. For every fixed number m≥2 of outcomes, the minimax regret over T rounds is of order Tm/(m+1), up to logarithmic factors. The upper bound allows arbitrary action spaces and agent heterogeneity, without smoothness or monotone-surplus assumptions. Its key is an effective-dimension reduction that the benchmark can be normalized even when fixed tie-breaking is not shift invariant, after which revealed preference yields a monotone response map in payment-difference coordinates. A learning policy built on a Lipschitz parametrization of this map attains the rate using only observed outcome categories. The lower-bound construction accounts for how incentive losses accumulate across outcome dimensions. It shows that each additional contractible outcome creates a precise and unavoidable increase in the worst-case cost of learning.
Rui Ai, David Simchi-Levi, Han Zhong
Massachusetts Institute of Technology · Shanghai Jiao Tong University