Adaptive Incentive Design in Dynamic Principal-Agent Problem via Kernelized Bandits

Abstract: We consider the dynamic principal-agent problem under asymmetric information, wherein a principal sequentially designs contracts to incentivize an agent with unknown preferences and hidden actions. A fundamental bottleneck in the existing literature is the assumption of deterministic agent utility, which renders the principal's expected utility discontinuous and forces computationally intractable discretizations of the contract space. In this paper, we address this limitation by introducing a stochastic counterpart into the agent's utility model, capturing the inherent physical and behavioral variations in realistic subsystems. We formally prove that this stochastic formulation restores the continuity of the principal's expected utility. Leveraging this continuous geometric structure, we formulate the interaction as a structured multi-armed bandit problem subject to heteroscedastic noise. We propose a \texttt{Heteroscedastic GP-UCB} algorithm that utilizes a Neural Network (Arcsin) kernel, chosen to capture the non-stationary, sigmoidal geometry of the utility landscape. For an $m$-dimensional compact contract space, we establish a high-probability cumulative regret bound of $O\left(\sqrt{T}(\log T)<sup>{m+1}\right)$. Finally, we demonstrate the practical efficacy of our theoretical framework by formulating the Vehicle-to-Grid (V2G) incentive design problem, proving its equivalence to a dynamic principal-agent problem, and showing superior economic performance for grid aggregators.