Christoph Wolf, Bocconi University: Informative Milestones in Experimentation

Department seminar. Christoph Wolf is an Assistant Professor at Bocconi University. He will present a paper entitled "Informative Milestones in Experimentation".

Photo of Christoph Wolf

Christoph Wolf.

Abstract:

I study a continuous-time moral hazard problem with private learning about a project of unknown quality. There is ex ante symmetric information and full commitment for the principal. The project generates a profit if two consecutive stages are completed. The amount of experimentation required to complete the first stage (milestone) is informative but not conclusive about the quality of the project. The informativeness of the milestone yields an incentive to privately shirk in the first stage. Shirking increases the principal's pessimism in the second stage and thereby induces more favorable second-stage contract terms for the agent. In the optimal contract, the reward for a first-stage success decreases in its arrival time to prevent effort delays. The reward's composition changes with the success time: early successes are rewarded with long second-stage deadlines and no bonus payments in the first stage, while later successes are rewarded with first-stage bonus payments and less continuation value from second-stage experimentation. Allowing for agent replacement between stages, I show that the principal wants to replace the agent in the second stage if the success arrives late.

Read the paper here (.pdf)

Host: Tuomas Laiho

Published Feb. 7, 2018 2:24 PM - Last modified Feb. 25, 2018 12:51 PM