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.

Optimal verification strategies in multi‐firm projects

“…As we observed in our prior work, 15 verification in systems engineering projects is fundamentally different from verification in supply chains, since systems engineering projects often involve novel designs that are often complex and costly, and which require the participation of engineers from multiple disciplines. Furthermore, in systems engineering projects, the contractor may only discover an erroneous component design when the entire system design is verified (e.g., discovering errors in embedded systems through hardware‐in‐loop simulations).…”

“…In Section 2, we provide a brief overview of the literature on verification activities and our motivation for using belief distributions. In Section 3, we provide a summary of our prior two‐firm model, 15 which forms the basic building block of the two‐level and network models presented in this paper. We then develop the two‐level model in Section 4.…”

Modeling correction activities in the context of verification strategies

“…Use of synthetic data is considered adequate because actual predictions are not relevant to showcase the application of the modeling framework. This is an accepted practice in this type of research 13,14,77 . This BN captures the prior beliefs of all elements.…”

“…Despite the strong coupling between VAs and CAs, and the criticality of CAs, existing research focuses on the modeling and selection of just one type of activity, significantly simplifying or even ignoring the other activity. For example, CAs are treated as direct properties of VAs (not as independent activities) in research that aims to develop system verification models or to design methods to generate verification strategies 1,[12][13][14][15][16] . Similarly, VAs are ignored in work that aims to better understand CA models or analysis methods 10,17 .…”

An Assessment of the Adequacy of Common Definitions of the Concept of System

“…For instance, the SE community's diversity can be observed in its ongoing efforts to establish the scientific foundations of SE [3][4][5][6][7]. The SE community utilizes concepts from decision analysis [8], economics [9], game theory [10], incentive theory [11], theory of belief functions [12], and probability [13], among others. Such diversity in approach, although pleasing, presents a communication challenge.…”