INCENTIVE DESIGN AND DYNAMIC CONTRACTING IN ASSET AND OPERATIONS MANAGEMENT

Abstract

The study of incentive design reflects on the fundamental concern of how to enhance the efficiency and productivity of the workforce. When the agent’s (e.g., the worker’s) effort could not be contracted upon, optimal contracting is designed to motivate the agent to work in the best interest of the principal (e.g., the firm). It is a classical problem called principal-agent with moral hazard. It has applications in many areas of economics and finance. For example, firms across many industries (e.g., airlines) rely on sales agents to generate revenue. This thesis focuses on the three aspects of optimal contracting problem. First, we study a multi-agent dynamic contracting problem under a hierarchical relationship between an investor, a partner of an investment company, and a portfolio manager (or managers) of the company. Second, we investigate the combination of dynamic contracting and pricing at the marketing-operations interface. Third, we integrate dynamic contracting and financial hedging to manage demand.