I am a Ph.D. student in economics at the University of Iowa. I will join the University of Adelaide in January 2013.
Department of Economics
University of Iowa
W210 Pappajohn Business Building
Iowa City, IA 52242
Office: S216 Pappajohn Business Building
Phone (mobile): (319) 512-8495
Abstract:This paper studies a continuous-time principal-agent problem in which a principal hires an agent to do a multi-stage R&D project. The agent's effort is unobservable and the transition from one stage to the next is modeled by a jump process with a constant Poisson arrival rate. We characterize the optimal dynamic contract that solves the repeated moral hazard problem. In it, the agent's payment decreases over time in case of failure and jumps up to a higher level after each success. We also provide an implementation of the optimal contract, in which a primary component of the agent's compensation is a risky security. This implementation gives a rationale for the wide-spread use of stock-based compensation by firms that rely on R&D.
Abstract: Most R&D projects are executed by employing teams of researchers and in distinct phases. These two features distinguish the agency problem that a firm faces with respect to its in-house R&D unit from traditional principal-agent problems. This paper analyzes this agency problem by studying a continuous-time multi-agent incentive problem in which a principal hires two risk-averse agents to perform a multi-stage R&D project. The completion of each stage is modeled by a Poisson type process, where the probability of success is jointly determined by the actions of both agents. We use recursive methods to characterize the optimal dynamic contract in this set-up. Our main result provides a new insight into the optimal incentive regime for multi-agent moral-hazard problems. In particular, we show explicitly the way in which the optimal incentive regime is a function of how agents' efforts interact with each other: relative-performance evaluation is used when their efforts are substitutes whereas joint-performance evaluation is used when their efforts are complements.
3. College Attendance under Endogenous Borrowing Constraints (work in progress)
with B. Ravikumar and Yuzhe Zhang.