Hidden-action in multi-hop routing

In multi-hop networks, the actions taken by individual intermediate nodes are typically hidden from the communicating endpoints; all the endpoints can observe is whether or not the end-to-end transmission was successful. Therefore, in the absence of incentives to the contrary, rational (i.e., selfish) intermediate nodes may choose to forward packets at a low priority or simply not forward packets at all. Using a principal-agent model, we show how the hidden-action problem can be overcome through appropriate design of contracts, in both the direct (the endpoints contract with each individual router) and recursive (each router contracts with the next down-stream router) cases. We further demonstrate that per-hop monitoring does not necessarily improve the utility of the principal or the social welfare in the system. In addition, we generalize existing mechanisms that deal with hidden-information to handle scenarios involving both hidden-information and hidden-action.