Exploitation Payoffs and Incentives for Exploration

Friday, 19 June 2026, 11am to 12.15pm

We study optimal contracting for innovation projects involving an initial exploration stage followed by exploitation, integrating the experimentation literature with dynamic corporate finance. The shape of the exploitation payoff frontier — not just its level — determines the optimal exploration contract and the duration of experimentation. When the exploitation stage involves moral hazard and limited liability, the principal's payoff is inverted-U shaped in the agent's continuation utility. In particular, the agent's incentive constraints may be slack during the exploration stage, which affects compensation dynamics and can reduce inefficiencies from under-experimentation. Applications to corporate governance and innovation subsidy design yield sharp policy prescriptions.

Speaker(s): William Fuchs (UT Austin McCombs / Carlos III Madrid)

Series: Nuffield Economic Theory Seminar

Venue: Manor Road Building - Seminar Room G - Seminar Room G Manor Road Building Manor Road Oxford Oxfordshire OX1 3UQ United Kingdom

Department: Economics (Department)