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 downstream 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.