Incentive contracts and strictly proper scoring rules

When a decision maker (DM) contracts with an expert to provide information, the nature of the contract can create incentives for the expert, and it is up to the DM to ensure that the contract provides incentives that align the expert's and DM's interests. In this paper, scoring rules (and related functions) are viewed as such contracts and are reinterpreted in terms of agency theory and the theory of revelation games from economics. Although scoring rules have typically been discussed in the literature as devices for eliciting and evaluating subjective probabilities, this study relies on the fact that strictly proper scoring rules reward greater expertise as well as honest revelation. We describe conditions under which a DM can use a strictly proper scoring rule as a contract to give an expert an incentive to gather an amount of information that is optimal from the DM's perspective. The conditions we consider focus on the expert's cost structure, and we find that the DM must have substantial knowledge of that cost structure in order to design a specific contract that provides the correct incentives. The model and analysis suggest arguments for hiring and maintaining experts in-house rather than using outside consultants.

Duke Scholars

Author Robert T. Clemen Fuqua School of Business