Hidden-action in network routing

In communication networks, such as the Internet or mobile ad-hoc networks, the actions taken by intermediate nodes or links 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) intermediaries may choose to forward messages at a low priority or simply not forward messages 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 directly) and the recursive (each router contracts with the next downstream router) cases. We further show that, depending on the network topology, perhop or per-path monitoring may not necessarily improve the utility of the principal or the social welfare of the system.