Coordination of verification activities with incentives: a two-firm model

Abstract

In systems engineering, verification activities evaluate the extent to which a system under development satisfies its requirements. In large systems engineering projects, multiple firms are involved in the system development, and hence verification activities must be coordinated. Self-interest impedes the implementation of verification strategies that are beneficial for all firms while encouraging each firm to choose a verification strategy beneficial to itself. Incentives for verification activities can motivate a single firm to adopt verification strategies beneficial to all firms in the project, but these incentives must be offered judiciously to minimize unnecessary expenditures and prevent the abuse of goodwill. In this paper, we use game theory to model a contractor-subcontractor scenario, in which the subcontractor provides a component to the contractor, who further integrates it into their system. Our model uses belief distributions to capture each firm's epistemic uncertainty in their component's state prior to verification, and we use multiscale decision theory to model interdependencies between the contractor and subcontractor's design. We propose an incentive mechanism that aligns the verification strategies of the two firms and using our game-theoretic model, we identify those scenarios where the contractor benefits from incentivizing the subcontractor's verification activities.