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A Note on Principal-Agent Problem in a Stochastic System

Received: 27 July 2021     Accepted: 5 August 2021     Published: 11 August 2021
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Abstract

We consider a principal (e.g., a ridesharing platform such as Uber or Lyft) who receives two types of jobs (e.g., passengers requesting solo or shared rides) according to a Poisson process. The principal first decides which jobs to admit and then assigns an agent (e.g., driver) to perform them. The agent who is assigned the job has preference between the two types of jobs. The agent can independently decide whether to accept or reject a job which is assigned to them. The principal and the agent receive different rewards from each job thus resulting in incentives misalignment. The research questions are: (1) which job(s) should the principal admit? (2) How much should the principal pay the agent? To answer these questions, we model the agent as an M / M / 1 loss system. Using a Markov decision process and dynamic programming, we find the optimal wage the principal should pay the agent and a threshold admission policy (also known as trunk-reservation or switching-curve policy). Prior literature did not consider two players (agent and principal) with misaligned objectives and each making dynamic decisions. We contribute to the literature by adding another layer of decision making and by introducing server (agent) independence wherein the servers have preferences regarding the type of job they wish to perform.

Published in American Journal of Operations Management and Information Systems (Volume 6, Issue 3)
DOI 10.11648/j.ajomis.20210603.11
Page(s) 29-34
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Revenue Management, Queueing, Principal-Agent, Stochastic

References
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[4] Noah Gans and Sergei Savin. Pricing and capacity rationing for rentals with uncertain durations. Management Science, 53 (3): 390–407, 2007.
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[10] E Lerzan Ormeci and Jan van der Wal. Admission policies for a two class loss system with general interarrival times. Stochastic Models, 22 (1): 37–53, 2006.
[11] EL Ormeci, A Burnetas, and J van der Wal. Admission policies for a two class loss system. Stochastic Models, 17 (4): 513–539, 2001.
[12] Martin L Puterman. Markov Decision Processes: Discrete Stochastic Dynamic Programming. John Wiley & Sons, 1994.
[13] Sergei V Savin, Morris A Cohen, Noah Gans, and Ziv Katalan. Capacity management in rental businesses with two customer bases. Operations Research, 53 (4): 617–631, 2005.
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[17] Utku Yildirim and John J Hasenbein. Admission control and pricing in a queue with batch arrivals. Operations Research Letters, 38 (5): 427–431, 2010.
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[19] Gabriel Zayas-Cab´an and Mark E Lewis. Admission control in a two-class loss system with periodically varying parameters and abandonments. Queueing Systems, 94 (1-2): 175–210, 2020.
Cite This Article
  • APA Style

    Jagan Jacob. (2021). A Note on Principal-Agent Problem in a Stochastic System. American Journal of Operations Management and Information Systems, 6(3), 29-34. https://doi.org/10.11648/j.ajomis.20210603.11

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    ACS Style

    Jagan Jacob. A Note on Principal-Agent Problem in a Stochastic System. Am. J. Oper. Manag. Inf. Syst. 2021, 6(3), 29-34. doi: 10.11648/j.ajomis.20210603.11

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    AMA Style

    Jagan Jacob. A Note on Principal-Agent Problem in a Stochastic System. Am J Oper Manag Inf Syst. 2021;6(3):29-34. doi: 10.11648/j.ajomis.20210603.11

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  • @article{10.11648/j.ajomis.20210603.11,
      author = {Jagan Jacob},
      title = {A Note on Principal-Agent Problem in a Stochastic System},
      journal = {American Journal of Operations Management and Information Systems},
      volume = {6},
      number = {3},
      pages = {29-34},
      doi = {10.11648/j.ajomis.20210603.11},
      url = {https://doi.org/10.11648/j.ajomis.20210603.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajomis.20210603.11},
      abstract = {We consider a principal (e.g., a ridesharing platform such as Uber or Lyft) who receives two types of jobs (e.g., passengers requesting solo or shared rides) according to a Poisson process. The principal first decides which jobs to admit and then assigns an agent (e.g., driver) to perform them. The agent who is assigned the job has preference between the two types of jobs. The agent can independently decide whether to accept or reject a job which is assigned to them. The principal and the agent receive different rewards from each job thus resulting in incentives misalignment. The research questions are: (1) which job(s) should the principal admit? (2) How much should the principal pay the agent? To answer these questions, we model the agent as an M / M / 1 loss system. Using a Markov decision process and dynamic programming, we find the optimal wage the principal should pay the agent and a threshold admission policy (also known as trunk-reservation or switching-curve policy). Prior literature did not consider two players (agent and principal) with misaligned objectives and each making dynamic decisions. We contribute to the literature by adding another layer of decision making and by introducing server (agent) independence wherein the servers have preferences regarding the type of job they wish to perform.},
     year = {2021}
    }
    

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    JF  - American Journal of Operations Management and Information Systems
    JO  - American Journal of Operations Management and Information Systems
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    AB  - We consider a principal (e.g., a ridesharing platform such as Uber or Lyft) who receives two types of jobs (e.g., passengers requesting solo or shared rides) according to a Poisson process. The principal first decides which jobs to admit and then assigns an agent (e.g., driver) to perform them. The agent who is assigned the job has preference between the two types of jobs. The agent can independently decide whether to accept or reject a job which is assigned to them. The principal and the agent receive different rewards from each job thus resulting in incentives misalignment. The research questions are: (1) which job(s) should the principal admit? (2) How much should the principal pay the agent? To answer these questions, we model the agent as an M / M / 1 loss system. Using a Markov decision process and dynamic programming, we find the optimal wage the principal should pay the agent and a threshold admission policy (also known as trunk-reservation or switching-curve policy). Prior literature did not consider two players (agent and principal) with misaligned objectives and each making dynamic decisions. We contribute to the literature by adding another layer of decision making and by introducing server (agent) independence wherein the servers have preferences regarding the type of job they wish to perform.
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Author Information
  • Business Analytics and Information Systems, Xavier University, Cincinnati, USA

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