Dual Moral Hazard and the Tyranny of Success

Enrique Ide

American Economic Journal: Microeconomics, 2024, vol. 16, issue 4, 154-91

Abstract: I explain why current success can undermine an organization's ability to innovate. I consider a standard bandit problem between a safe and a risky arm with two modifications. First, a principal allocates resources. Second, an agent must install the risky arm, which is not contractible. If the principal cannot commit to a resource policy, a dual moral hazard problem emerges: The agent's pay must be tied to the risky arm's success to encourage installation, inducing the principal to stop experimenting with the arm prematurely. This problem intensifies as the safe arm becomes more profitable, potentially leaving the organization worse off.

JEL-codes: D21 D82 D86 O31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/mic.20220344

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