Experimentation in Organizations
Sofia Moroni
University of Pittsburgh
moroni@pitt.edu
October 14, 2015
Abstract
I consider a dynamic moral hazard model in which a principal provides incentives to a team of agents who work on a risky project. The project involves several milestones of unknown feasibility. At each point in time agents exert private effort. While agents exert effort without achieving milestones, their private belief in the feasibility of the project declines. This learning gives rise to rents. Agents have incentives to delay effort and free-ride on other agents’ discoveries when the principal attempts to extract full surplus. In the revenue maximizing contract the amount of experimentation is inefficiently low. Agents’ contracts are highly sensitive to their performance in early stages. Agents who succeed are rewarded with bonuses, reduced competition, more leeway to experiment and higher bonuses conditional on success later in the project. The principal prefers to reward agents for early successes with better contract terms or promotions rather than with monetary bonuses. I provide conditions under which projects start small, with some workers sitting idle until a milestone is reached. Under these conditions identical agents face ex-ante asymmetric contracts. My results can be applied to the design of contests for innovation.
Keywords: principal-agent, moral hazard in teams, experimentation, two-armed bandit,contests.
JEL Codes: D82, D83, D86.
