Algorithms for Optimizing Leveled Commitment Contracts

Abstract

In au to mated negotiation systems consisting of self-interested agents, contracts have traditionally been binding. Leveled commitment contracts-i.e. contracts where each party can decommit by paying a predetermined penaltywere recently shown to improve Pareto efficiency even if agents rationally decommit in Nash equilibrium using inflated thresholds on how good their outside offers must be before they decommit . This paper operationalizes the four leveled commitment contracting protocols by presenting algorithms for using them. Algorithms are presented for computing the Nash equilibrium decommitting thresholds and decommitting probabilities given the contract price and the penalties. Existence and uniqueness of the equilibrium are analyzed . Algorithms are also presented for optimizing the contract itself (price and penalties). Existence and uniqueness of the optimum are analyzed. Using the algorithms we offer a contract optimization service on the web as part of eMediator, our next generation electronic comm~rce server. Finally, the algorithms are generalized to contracts involving more than two agents.