Experimentation and project selection: screening and learning

Gomes, Renato, Gottlieb, Daniel ORCID: 0000-0002-0555-6185 and Maestri, Lucas (2016) Experimentation and project selection: screening and learning. Games and Economic Behavior, 96. 145 - 169. ISSN 0899-8256

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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
Official URL:	https://www.sciencedirect.com/journal/games-and-ec...
Additional Information:	© 2016 Elsevier Inc
Divisions:	Management
Subjects:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HB Economic Theory
JEL classification:	D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M12 - Personnel Management O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O34 - Intellectual Property Rights: National and International Issues
Date Deposited:	26 Oct 2019 12:03
Last Modified:	06 Apr 2024 21:15
URI:	http://eprints.lse.ac.uk/id/eprint/102229

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