Designing Incentive Schemes Based on Intervention: The Case of Imperfect Monitoring

Abstract: We propose an incentive scheme based on intervention to sustain cooperation among self-interested users. In the proposed scheme, an intervention device collects imperfect signals about the actions of the users for a test period, and then chooses the level of intervention that degrades the performance of the network for the remaining time period. We analyze the problems of designing an optimal intervention rule given a test period and choosing an optimal length of the test period. The intervention device can provide the incentive for cooperation by exerting intervention following signals that involve a high likelihood of deviation. Increasing the length of the test period has two counteracting effects on the performance: It improves the quality of signals, but at the same time it weakens the incentive for cooperation due to increased delay.