Curtis R. Taylor

We study the optimal allocation of tasks over the life cycle of an innovative project. Innovation requires two complementary activities, research and development, both subject to moral hazard. Agents also privately observe the quality of discoveries, so the principal must elicit truthful reports to avoid costly mistakes. Assigning both tasks to a single "solo operator" avoids free-riding but creates a double-deviation problem: the agent can shirk on research and conceal the resulting low-quality discovery. As time passes without a discovery, this deviation becomes increasingly attractive. Separating the tasks across two agents eliminates the double deviation but introduces free-riding. We characterize how this tradeoff shapes organization over time. When low-quality discoveries are readily exposed, the project is run by sequential solo operators; when they are difficult to expose, a two-agent team is optimal from the outset. At intermediate levels of detectability, the project begins with a solo operator and switches endogenously to a team.

Competition in research tournaments has two facets. More rivals dilute the expected prize, but they also make any current discovery less safe and thereby increase the value of continued search. We study this tradeoff in a continuous-time model in which contestants search sequentially, stop at an equilibrium threshold, and compete for a fixed prize. Encouragement can dominate in small or short contests, while dilution dominates once contests become sufficiently large or long. Thus equilibrium effort is single-peaked in the number of contestants: competition can stimulate innovation before it discourages it.

An entrepreneur contracts with a consultant, who is protected by limited liability, to supply information about the state of a project prior to investing in it. For a given level of investment, a good project succeeds with higher probability than a bad one. The entrepreneur makes an upfront payment that the consultant can either invest in information acquisition (work) or divert for private benefit (shirk). If the consultant works, then he privately observes an unverifiable signal concerning the state of the project. Whether he works or shirks, the consultant reports a signal realization to the entrepreneur who then invests in the project in accordance with the advice she receives. Three contracting environments are considered: (i) complete contingent contracts in which compensation to the consultant may depend on reports, investment levels, and project outcomes; (ii) incomplete contingent contracts in which compensation may depend only on reports and project outcomes; and (iii) reputational contracts in which the consultant receives a non-contingent payment from a sequence of entrepreneurs so long as his referrals remain high. The principal under-utilizes information in settings (i) and (ii). In setting (iii) investments are statically but not dynamically efficient. For some parameter values the consultant shirks with positive probability and, therefore, supplies garbled advice. Finally, it is shown that if the consultant delivers no advice, then he nevertheless must be compensated in setting (i) and penalized in setting (iii).

An entrepreneur contracts with a consultant, who is protected by limited liability, to supply information about the state of a project prior to investing in it. For a given level of investment, a good project succeeds with higher probability than a bad one. The entrepreneur makes an upfront payment that the consultant can either invest in information acquisition (work) or divert for private benefit (shirk). If the consultant works, then he privately observes an unverifiable signal concerning the state of the project. Whether he works or shirks, the consultant reports a signal realization to the entrepreneur who then invests in the project in accordance with the advice she receives. Three contracting environments are considered: (i) complete contingent contracts in which compensation to the consultant may depend on reports, investment levels, and project outcomes; (ii) incomplete contingent contracts in which compensation may depend only on reports and project outcomes; and (iii) reputational contracts in which the consultant receives a non-contingent payment from a sequence of entrepreneurs so long as his referrals remain high. The principal under-utilizes information in settings (i) and (ii). In setting (iii) investments are statically but not dynamically efficient. For some parameter values the consultant shirks with positive probability and, therefore, supplies garbled advice. Finally it is shown that if the consultant delivers no advice, then he nevertheless must be compensated in setting (i) and penalized in setting (iii).

This article summarizes and draws connections among diverse streams of empirical and theoretical research on the economics of privacy. Our focus is on the econo

Motivated by the unprecedented availability of consumer information on the Internet, we characterize the winners and losers from potential privacy regulation in

We study the optimal provision of incentives in a dynamic multistage agency setting. Specifically, there is a project, whose benefits are realized only after mu

When a firm can recognize its previous customers, it may use information about their past purchases in order to price discriminate. We study a model with a monopolist and a continuum of heterogeneous consumers, where consumers have the ability to maintain their anonymity and avoid being identified as past customers, possibly at a cost. When consumers can freely maintain their anonymity, they all individually choose to do so, which results in the highest profit for the monopolist. Increasing the cost of anonymity can benefit consumers, but only up to a point, after which the effect is reversed. We show that if the monopolist or an independent third party controls the cost of anonymity, it often works to the detriment of consumers.

How do price commitments impact the amount of information firms acquire about potential customers? We examine this question in the context of a competitive market. Contracts are incomplete because the amount of information firms acquire about applicants during the screening process cannot be observed. Despite competition, we find that firms search for too much information in equilibrium. If price discrimination is prohibited, then members of high-risk groups suffer disproportionately high rejection rates. If rejected applicants remain in the market, then the resulting adverse selection can be so severe that all parties would be better off if no information were collected. We apply the results to the increasingly competitive US market for mortgages.

A principal contracts optimally with an agent to operate a firm over an infinite time horizon when the agent is liquidity constrained and has access to private information about the sequence of cost realizations. We formulate this mechanism design problem as a recursive dynamic program in which promised utility to the agent is the relevant state variable. By establishing that output distortions and the stringency of liquidity constraints decrease monotonically in promised utility, we are able to interpret the state variable as the agent’s equity in the firm. We establish a bang-bang property of optimal contracts wherein the agent is incentivised only through adjustments to his future utility until achieving a critical level of equity, after which he may be incentivised through cash payments, that is, through instantaneous rents. Thus the incentive scheme resembles what is commonly regarded as a sweat equity contract, with all cash payments net of costs (rents) being back loaded. A critical level of sweat equity occurs when none of the agent’s liquidity constraints bind. At this point, the contract calls for efficient production in all future periods and the agent attains a vested ownership stake in the firm. Finally, properties of the theoretically optimal contract are shown to be similar to features common in real-world work-to-own franchising agreements and venture capital contracts.