Experimentation in Organizations
No 5876, Working Paper from Department of Economics, University of Pittsburgh
I consider a moral hazard problem in which a principal provides incentives to a team of agents towork on a risky project. The project consists of two milestones of unknown feasibility. While workingunsuccessfully, the agentsâ€™ private beliefs regarding the feasibility of the project decline. This learningrequires the principal to provide rents to prevent the agents from procrastinating and free-riding onothersâ€™ discoveries. To reduce these rents the principal stops the project inefficiently early and givesidentical agents asymmetric experimentation assignments. The principal prefers to reward agents withbetter contract terms or task assignments rather than monetary bonuses.
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