• Graduate program
    • Why Tinbergen Institute?
    • Program Structure
    • Courses
    • Course Registration
    • Recent PhD Placements
    • Admissions
    • Facilities
  • Research
  • News
  • Events
    • Events Calendar
    • Tinbergen Institute Lectures
    • Annual Tinbergen Institute Conference
    • Events Archive
    • Summer School
      • Introduction in Genome-Wide Data Analysis
      • Inequalities in Health and Healthcare
      • Crash Course in Experimental Economics
      • Econometric Methods for Forecasting and Data Science
      • Behavioral Macro and Complexity
  • Times
Home | Events Archive | Financing Breakthroughs under Failure Risk
Seminar

Financing Breakthroughs under Failure Risk


  • Series
    Array
  • Speaker
    Simon Mayer (Erasmus University Rotterdam)
  • Location
    Rotterdam
  • 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.