Experimentation and project selection: Screening and learning

Renato Gomes, Daniel Gottlieb () and Lucas Maestri

Games and Economic Behavior, 2016, vol. 96, issue C, 145-169

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.

Keywords: Adverse selection; Experimentation; Bandit problem; Multi-dimensional screening; Entrepreneurship (search for similar items in EconPapers)
JEL-codes: D21 J33 M12 O31 O34 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:96:y:2016:i:c:p:145-169

DOI: 10.1016/j.geb.2016.02.001

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