@article{efa1ff88b9c74787ad42a5b26cc80270,
title = "Rewarding successes discourages experimentation",
abstract = "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.",
keywords = "Budget allocation, Experimentation, Federalism, Innovation, Risk aversion",
author = "Kimiko Terai and Amihai Glazer",
note = "Funding Information: * Terai: Keio University, 2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan (kterai@ econ.keio.ac.jp); Glazer: University of California–Irvine, Irvine, California 92697, U.S.A. (aglazer@uci.edu). We thank the Editor (Ronnie Sch{\"o}b) and an anonymous referee for their useful comments. We also greatly value the comments and discussions by Murat Yilmaz and seminar participants at Keio University, Kobe University, and the 2015 Annual Meeting of the European Public Choice Society. Financial support by the Charles Koch Founda-tion, a Grants-in-Aid for Scientific Research (A) (24243042), the Grants-in-Aid for Scien-tific Research (B) (26285059, 26285065), and the Grants-in-Aid for Scientific Research (C) (26380370) from the Ministry of Education, Culture, Sports, Science, and Technology of Japan are gratefully acknowledged. Publisher Copyright: {\textcopyright} 2017 Mohr Siebeck.",
year = "2017",
month = dec,
doi = "10.1628/001522117X15006332556852",
language = "English",
volume = "73",
pages = "361--381",
journal = "FinanzArchiv",
issn = "0015-2218",
publisher = "JCB Mohr",
number = "4",
}