Financing contract with adverse selection and moral hazard for spectrum trading in cognitive radio networks

In cognitive radio networks (CRNs), spectrum trading is an efficient way for secondary users (SUs) to achieve dynamic spectrum access and to bring economic benefits for the primary users (PUs). Unlike the one shot trading designs in previous studies, in this paper, we introduce a financing contract that allows the SU to pay only part of the total amount when the contract is signed, known as the down payment. Then, after the spectrum is released, the SU pays the rest of the money, known as the installment payment, from the revenue generated by utilizing the spectrum. As the PU may not have the full acknowledgement of the SU´s capability in generating revenue, nor the amount of effort the SU exerts, the problems of adverse selection and moral hazard arise in the two scenarios, respectively. In particular, we consider three situations when either or both adverse selection and moral hazard are present during the trading. We find the optimal solutions in all three scenarios. Through simulations, we show that the adverse selection only and moral hazard only cases serve as the lower and upper bounds of the general case where both problems are present.