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Optimal Contracts for Experimentation

Review of Economic Studies 2016 83(3), 1040-1091 open access
This paper studies a model of long-term contracting for experimentation. We consider a principal–agent relationship with adverse selection on the agent’s ability, dynamic moral hazard, and private learning about project quality. We find that each of these elements plays an essential role in structuring dynamic incentives, and it is only their interaction that generally precludes efficiency. Our model permits an explicit characterization of optimal contracts.