• Graduate program
    • Why Tinbergen Institute?
    • Program Structure
    • Courses
    • Course Registration
    • Facilities
    • Admissions
    • Recent PhD Placements
  • Research
  • News
  • Events
    • Summer School
      • Behavioral Macro and Complexity
      • Econometrics and Data Science Methods for Business and Economics and Finance
      • Experimenting with Communication – A Hands-on Summer School
      • Inequalities in Health and Healthcare
      • Introduction in Genome-Wide Data Analysis
      • Research on Productivity, Trade, and Growth
      • Summer School Business Data Science Program
    • Events Calendar
    • Tinbergen Institute Lectures
    • Annual Tinbergen Institute Conference
    • Events Archive
  • Summer School
  • Alumni
  • Times
Home | Events Archive | Financing Breakthroughs under Failure Risk

Financing Breakthroughs under Failure Risk

  • Location
  • Date and time

    December 11, 2018
    13:08 - 14:08

I study a dynamic moral hazard problem, in which a principal hires an agent to develop and complete a project. The project is subject to failure risk and its progress is unobservable. The agent does not only control when the project is completed but also its propensity to fail or succeed upon completion. To motivate truthful disclosure of project failure, the optimal contract is lenient towards early but harsh towards late realizations of adverse events, such as project failure or delays in its completion. During the project’s development phase, the power of the agent’s incentives rises, not only leading to larger payments for later breakthroughs but also larger penalties for later failures. Overall, the agent is provided stronger equity incentives compared to the benchmark with observable project progress. For risky innovation projects, the optimal compensation scheme involves substantial tolerance for failure combined with a generous reward for success.