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Rewarding Successes Discourages Experimentation

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Consider a principal who allocates a fixed budget among risk-averse agents. Each agent first chooses a policy or project. After observing the outcomes of their choices, the principal allocates a larger budget to the agents who had adopted the policy with the superior outcome. A subgame perfect Nash equilibrium may have all agents make the same choice, though the principal would prefer that they experiment. If the number of agents is large, or if the principal commits to reducing the aggregate budget when no agent had the superior outcome, or if he commits to avoid funding a riskless policy, different agents can be induced to adopt different policies.
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Keywords: BUDGET ALLOCATION; EXPERIMENTATION; FEDERALISM; INNOVATION; RISK AVERSION

Document Type: Research Article

Publication date: 01 December 2017

This article was made available online on 23 August 2017 as a Fast Track article with title: "Rewarding Successes Discourages Experimentation".

More about this publication?
  • As one of the world's oldest professional journals in public finance, founded in 1884, FinanzArchiv (FA) publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.

    FA is a peer-reviewed journal commited to a prompt turnaround of submissions.

    FA is listed in the Social Science Citation Index (SSCI), in Current Contents/Social and Behavioral Sciences, in Econ Lit, in the Journal of Economic Literature, in IDEAS and RePEc and in the International Bibliography of the Social Sciences.

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