Incentives for Experimenting Agents

157 Pages Posted: 19 Jun 2013

See all articles by Johannes Horner

Johannes Horner

Yale University - Cowles Foundation

Larry Samuelson

Yale University - Department of Economics; Yale University - Cowles Foundation

Multiple version iconThere are 4 versions of this paper

Date Written: June 17, 2013

Abstract

We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The repeated interaction gives rise to a dynamic agency cost – the more lucrative is the agent’s stream of future rents following a failure, the more costly are current incentives for the agent, giving the principal an incentive to reduce the continuation value of the project. We characterize the set of recursive Markov equilibria. We show that there are non-Markov equilibria that make the principal better off than the recursive Markov equilibrium, and that may make both players better off. Efficient equilibria front-load the agent’s effort, inducing as much experimentation as possible over an initial period, until making a switch to the worst possible continuation equilibrium. The initial phase concentrates the agent’s effort near the beginning of the project, where it is most valuable, while the eventual switch to the worst continuation equilibrium attenuates the dynamic agency cost.

Keywords: Experimentation, Learning, Agency, Dynamic agency, Venture capital, Repeated principal-agent problem

JEL Classification: D8, L2

Suggested Citation

Horner, Johannes and Samuelson, Larry, Incentives for Experimenting Agents (June 17, 2013). Cowles Foundation Discussion Paper No. 1726RRR, Available at SSRN: https://ssrn.com/abstract=2280477 or http://dx.doi.org/10.2139/ssrn.2280477

Johannes Horner (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Larry Samuelson

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
93
Abstract Views
1,049
Rank
119,803
PlumX Metrics