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Related Experiment Videos

Shortcuts in complex engineering systems: a principal-agent approach to risk management.

Russ Garber¹, Elisabeth Paté-Cornell

¹Management Science and Engineering, Stanford University, CA, USA. rgarber@alumni.stanford.edu

Risk Analysis : an Official Publication of the Society for Risk Analysis

|January 4, 2012

Summary

Principals can prevent engineers from taking shortcuts by adjusting incentives and penalties. This study uses a principal-agent model and risk analysis to optimize project outcomes and minimize system failure risks.

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Area of Science:

Engineering Management
Decision Analysis
Risk Management

Background:

Engineered systems development is susceptible to shortcuts, impacting project timelines and safety.
Understanding the factors driving these shortcuts is crucial for effective project oversight.

Purpose of the Study:

To analyze the impact of shortcuts in engineered systems development using a principal-agent model.
To determine optimal principal strategies for mitigating risks associated with agent shortcuts.

Main Methods:

Utilized a principal-agent framework to model the relationship between project principals and agents.
Employed probabilistic risk analysis to quantify system failure risks stemming from shortcuts.
Analyzed optimal incentive structures, including payments, penalties, and inspections, for risk-averse and risk-neutral agents with limited liability.

Main Results:

Shortcut occurrences correlate with agent incentives and initial effort to maintain schedules.
Optimal principal settings can deter agents from taking shortcuts, increasing agent effort and principal value.
The analysis considers agents with limited liability, both risk-neutral and risk-averse.

Conclusions:

Effective incentive design and risk management are key to preventing shortcuts in engineered systems.
Principals can strategically influence agent behavior to enhance project outcomes and system reliability.
The findings provide a framework for optimizing oversight in complex development projects.