Exploitation Payoffs and Incentives for Exploration

Aug 4, 2025

Martin Dumav , William Fuchs , Jangwoo Lee

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We study a dynamic moral hazard problem involving initial exploration followed by exploitation, merging experimentation with dynamic corporate finance. We show how the methods and conclusions of the experimentation literature change when considering the exploitation phase’s non-monotonic payoff structure that arises naturally in the presence of moral hazard and limited liability. In particular, the agent’s incentive constraints may be slack during the exploration phase, which affects compensation dynamics and can reduce inefficiencies from under-experimentation.

Martin Dumav

Martin Dumav

William Fuchs

William Fuchs