Experimentation and project selection: Screening and learning

Gomes, Renato, Gottlieb, Daniel and Maestri, Lucas (2016) Experimentation and project selection: Screening and learning. Games and Economic Behavior, 96. pp. 145-169.

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Official URL: http://tse-fr.eu/pub/30891

Abstract

Firms must strike a delicate balance between the exploitation of well-known business models and the exploration of risky, untested approaches. In this paper, we study financial contracting between an investor and a firm with private information about its returns from exploration and exploitation. The investor-optimal mechanism offers contracts with different tolerance for failures to screen returns from exploitation, and with different exposure to the project's revenues to screen returns from exploration. We derive necessary and sufficient conditions for private information about returns from exploration to have zero value to the firm. When these conditions fail, private information about exploration may even decrease the firm's payoff.

Item Type: Article
Language: English
Date: March 2016
Refereed: Yes
Uncontrolled Keywords: Adverse selection, Experimentation, Bandit problem, Multi-dimensional screening, Entrepreneurship
JEL codes: D21 - Firm Behavior
J33 - Compensation Packages; Payment Methods
M12 - Personnel Management
O31 - Innovation and Invention - Processes and Incentives
O34 - Intellectual Property Rights - National and International Issues
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 22 Sep 2016 08:23
Last Modified: 07 Mar 2018 13:23
OAI ID: oai:tse-fr.eu:30891
URI: http://publications.ut-capitole.fr/id/eprint/22379

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