41 Pages Posted: 2 Nov 2016 Last revised: 20 Oct 2018
Date Written: October 17, 2018
I explore how a characteristic feature of creative work---hitting dead ends---affects incentives. To solve a problem, an agent works on successive ideas, each of which may succeed with some probability. At each instant, the agent chooses whether to exert effort. The agent may also abandon his idea, incurring delay to come up with a new one. We gain a new explanation why high-powered incentives may discourage creativity: with high rewards, the agent is reluctant to incur delay and spends time working on dead ends. In a principal-agent setting with moral hazard, optimal contracts exhibit front-loading because high continuation values increase the cost of current incentives. My main finding is that contract structure depends on which player is more patient. Impatient principals impose deadlines, while patient principals grant tenure, using delay rather than the threat of termination to reduce incentive costs.
Keywords: Innovation, Experimentation, Exponential Bandits
JEL Classification: D81, D83
Suggested Citation: Suggested Citation