Rewarding Failure

37 Pages Posted: 5 Dec 2018 Last revised: 12 Jun 2019

See all articles by Aditya Kuvalekar

Aditya Kuvalekar

Universidad Carlos III de Madrid

Nishant Ravi

University of Pennsylvania, School of Arts & Sciences, Department of Economics

Date Written: June 2019

Abstract

We explore when and how to reward failure in a dynamic principal-agent relationship with experimentation. The agent receives flow rents from experimentation, and divides his time between searching for evidence of success and failure about the underlying project. The principal commits in advance to rewards conditional on the type of evidence. At each instant, the principal makes a firing decision. We show that the principal’s optimal equilibrium features a stark reward structure—either the principal does not reward failure at all or rewards success and failure equally.

Keywords: dynamic agency, experimentation

JEL Classification: C73, D83, D86, M51

Suggested Citation

Kuvalekar, Aditya and Ravi, Nishant, Rewarding Failure (June 2019). Available at SSRN: https://ssrn.com/abstract=3281644 or http://dx.doi.org/10.2139/ssrn.3281644

Aditya Kuvalekar (Contact Author)

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Nishant Ravi

University of Pennsylvania, School of Arts & Sciences, Department of Economics ( email )

160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States

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