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

Authors
  • Garber, Russ
  • Paté-Cornell, Elisabeth
Type
Published Article
Journal
Risk analysis : an official publication of the Society for Risk Analysis
Publication Date
May 01, 2012
Volume
32
Issue
5
Pages
836–854
Identifiers
DOI: 10.1111/j.1539-6924.2011.01736.x
PMID: 22212012
Source
Medline
License
Unknown

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.

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