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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
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.
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.
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