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  3. American Economic Journal: Microeconomics
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  5. Dual Moral Hazard and The Tyranny of Success

American Economic Journal:
Microeconomics

ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)

Dual Moral Hazard and The Tyranny of Success

  • Enrique Ide
American Economic Journal: Microeconomics (Forthcoming)

Abstract

I explain why current success can undermine an organization’s ability to innovate. I consider a standard bandit problem between a safe and a risky arm with two modifications. First, a principal allocates resources. Second, an agent must install the risky arm, which is not contractible. If the principal cannot commit to a resource policy, a dual moral hazard problem emerges: The agent’s pay must be tied to the risky arm’s success to encourage installation, inducing the principal to stop experimenting with the arm prematurely. This problem intensifies as the safe arm becomes more profitable, potentially leaving the organization worse off.

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