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Dual Moral Hazard and the Tyranny of Success

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  • Enrique Ide

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.

Suggested Citation

  • Enrique Ide, 2024. "Dual Moral Hazard and the Tyranny of Success," American Economic Journal: Microeconomics, American Economic Association, vol. 16(4), pages 154-191, November.
    • Handle: RePEc:aea:aejmic:v:16:y:2024:i:4:p:154-91
    DOI: 10.1257/mic.20220344
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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