Premium
Shortcuts in Complex Engineering Systems: A Principal‐Agent Approach to Risk Management
Author(s) -
Garber Russ,
PatéCornell Elisabeth
Publication year - 2012
Publication title -
risk analysis
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.972
H-Index - 130
eISSN - 1539-6924
pISSN - 0272-4332
DOI - 10.1111/j.1539-6924.2011.01736.x
Subject(s) - principal (computer security) , incentive , probabilistic logic , risk analysis (engineering) , payment , risk management , schedule , principal–agent problem , liability , computer science , operations research , engineering , actuarial science , business , computer security , economics , microeconomics , artificial intelligence , finance , operating system , corporate governance , world wide web
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.