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The importance of being honest

Author

Listed:
  • Klein, Nicolas

    (Départmenent de Sciences Économiques, Université de Montréal and CIREQ)

Abstract

This paper analyzes the case of a principal who wants to provide an agent with proper incentives to explore a hypothesis that can be either true or false. The agent can shirk, thus never proving the hypothesis, or he can avail himself of a known technology to produce fake successes. This latter option either makes the provision of incentives for honesty impossible or does not distort its costs at all. In the latter case, the principal will optimally commit to rewarding later successes even though he only cares about the first one. Indeed, after an honest success, the agent is more optimistic about his ability to generate further successes. This, in turn, provides incentives for the agent to be honest before a first success.

Suggested Citation

  • Klein, Nicolas, 2016. "The importance of being honest," Theoretical Economics, Econometric Society, vol. 11(3), September.
    • Handle: RePEc:the:publsh:1913
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    References listed on IDEAS

    as
    1. Gustavo Manso, 2011. "Motivating Innovation," Journal of Finance, American Finance Association, vol. 66(5), pages 1823-1860, October.
    2. Johannes Hörner & Larry Samuelson, 2013. "Incentives for experimenting agents," RAND Journal of Economics, RAND Corporation, vol. 44(4), pages 632-663, December.
    3. Dirk Bergemann & Ulrigh Hege, 2005. "The Financing of Innovation: Learning and Stopping," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 719-752, Winter.
    4. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Kaustav Das & Nicolas Klein & Katharina Schmid, 2020. "Strategic experimentation with asymmetric players," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(4), pages 1147-1175, June.
    2. Boleslavsky, Raphael & Taylor, Curtis R., 2024. "Make it 'til you fake it," Journal of Economic Theory, Elsevier, vol. 217(C).
    3. Alessandro Spiganti, 2022. "Wealth Inequality and the Exploration of Novel Alternatives," Working Papers 2022:02, Department of Economics, University of Venice "Ca' Foscari".
    4. Daniel Hauser, 2016. "Promoting a Reputation for Quality," PIER Working Paper Archive 16-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 29 Sep 2016.
    5. Gomes, Renato & Gottlieb, Daniel & Maestri, Lucas, 2016. "Experimentation and project selection: Screening and learning," Games and Economic Behavior, Elsevier, vol. 96(C), pages 145-169.
    6. Forand, Jean Guillaume, 2015. "Keeping your options open," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 47-68.
    7. Kaustav Das & Nicolas Klein, 2024. "Do Stronger Patents Lead To Faster Innovation? The Effect Of Clustered Search," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 915-954, May.
    8. Klein, Nicolas, 2013. "Strategic learning in teams," Games and Economic Behavior, Elsevier, vol. 82(C), pages 636-657.
    9. Kaustav Das & Nicolas Klein, 2020. "Do Stronger Patents Lead to Faster Innovation? The Effect of Duplicative Search," Discussion Papers in Economics 20/03, Division of Economics, School of Business, University of Leicester.
    10. Sofia Moroni, 2019. "Experimentation in Organizations," Working Paper 6631, Department of Economics, University of Pittsburgh.
    11. Sadler, Evan, 2021. "Dead ends," Journal of Economic Theory, Elsevier, vol. 191(C).
    12. Christoph Carnehl & Johannes Schneider, 2021. "On Risk and Time Pressure: When to Think and When to Do," Papers 2111.07451, arXiv.org, revised Mar 2022.
    13. Alessandro Spiganti, 2020. "Can Starving Start‐ups Beat Fat Labs? A Bandit Model of Innovation with Endogenous Financing Constraint," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 702-731, April.

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    More about this item

    Keywords

    Dynamic moral hazard; continuous-time principal-agent models; optimal incentive scheme; experimentation; bandit models; Poisson process; Bayesian learning;
    All these keywords.

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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