Jan Knoepfle, Aalto University

"Inspecting Experimentation"

Abstract

A principal offers a dynamic contract for experimentation to an agent with limited liability. The agent's effort is hidden but the principal can schedule costly inspections which reveal the effort history. The optimal contract takes a simple structure: Inspections are deterministically scheduled with increasing distance. I discuss an implementation through stage-financing, where funds are released after each inspection for the entire stage until the next inspection. Inspections make funding in multiple stages a necessary feature of the optimal contract.

Contact person: Julia Salmi