Harnessing Information in Incentive Design

2025-09-02

AI Summary

This paper investigates incentive design in principal–agent problems under information asymmetry, focusing on mitigating the agent’s informational advantage to reduce the principal’s cost. We model the interaction using matrix games and quadratic Gaussian games, systematically integrating two complementary mechanisms: information design (committing to signal structures) and active information acquisition (endogenous effort by the agent to refine beliefs). Our analysis formally characterizes how agents participate in belief formation. Theoretically, we show that introducing controllable uncertainty—though increasing expected costs—enables agents to influence the principal’s prior beliefs, thereby substantially reducing information rents. Crucially, when agents endogenously shape their own participation beliefs, the principal achieves efficient resource allocation at significantly lower incentive costs. This reveals the positive role of “co-constructed beliefs” in enhancing incentive efficiency and establishes a novel paradigm for optimizing information structures in delegation settings.

Technology Category

• Multiagent Systems: Mechanism Design
• Game Theory and Economic Paradigms: Mechanism Design
• Knowledge Representation and Reasoning: Reasoning with Beliefs

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Responsible Web: Machine-in-the-loop, human agency and autonomy
• Security and Privacy: Privacy-enhancing technologies

Abstract

Incentive design deals with interaction between a principal and an agent where the former can shape the latter's utility through a policy commitment. It is well known that the principal faces an information rent when dealing with an agent that has informational advantage. In this work, we embark on a systematic study of the effect of information asymmetry in incentive design games. Specifically, we first demonstrate that it is in principal's interest to decrease this information asymmetry. To mitigate this uncertainty, we let the principal gather information either by letting the agent shape her belief (aka Information Design), or by paying to acquire it. Providing solutions to all these cases we show that while introduction of uncertainty increases the principal's cost, letting the agent shape its belief can be advantageous. We study information asymmetry and information acquisition in both matrix games and quadratic Gaussian game setups.

Problem

• Studying information asymmetry effects in incentive design games
• Investigating principal's information acquisition and belief shaping
• Analyzing uncertainty mitigation in matrix and quadratic games

Innovation

• Information design to reduce agent's advantage
• Principal acquires information to mitigate uncertainty
• Agent shapes belief to lower principal's cost