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
Abstract:
In this article, we examine the effects of shortcuts in the development of engineered systems through a principal-agent model. We find that occurrences of illicit shortcuts are closely related to the incentive structure and to the level of effort that the agent is willing to expend from the beginning of the project to remain on schedule. Using a probabilistic risk analysis to determine the risks of system failure from these shortcuts, we show how a principal can choose optimal settings (payments, penalties, and inspections) that can deter an agent from cutting corners and maximize the principal's value through increased agent effort. We analyze the problem for an agent with limited liability. We consider first the case where he is risk neutral; we then include the case where he is risk averse.
Related Concept Videos
System of Forces and Couples
The principle of transmissibility plays a crucial role in this process. According to...
Mechanistic Models: Compartment Models in Algorithms for Numerical Problem Solving
In individual population analyses, different algorithms are employed, such as Cauchy's method, which uses a...
Principal Stresses: Problem Solving
Design Example: Analyzing Capacity Contours for Flood Risk Assessment
Mechanistic Models: Overview of Compartment Models
Optimization Problems