Assistant Professor of Economics at Indian Institute of Technology, Kanpur Department of Economic Sciences Indian Institute of Technology Faculty Building Kanpur 208016 Phone: 0512-259-7476 E-mail: bikramd@iitk.ac.in Working Papers A principal contracts with an agent whose ability is uncertain. Ability is learnt from the agent's performance in projects that the principal finances over time. Success however also depends on the quality of the project at hand, and quality is privately observed by the agent who is biased towards implementation. We characterize the optimal sequence of rewards in a relationship that tolerates an endogenously determined finite number of failures and incentivizes the agent to implement only good projects by specifying rewards for success as a function of past failures. The fact that success becomes less likely over time suggests that rewards for success should increase with past failures. However, this also means that the agent can earn a rent from belief manipulation by deviating and implementing a bad project which is sure to fail. We show that this belief-manipulation rent decreases with past failures and implies that optimal rewards are front-loaded. The optimal contract resembles the arrangements used in venture capital, where entrepreneurs must give up equity share in exchange for further funding following failure. When does informal risk sharing act as barrier or support to the take-up of index-based weather insurance? We evaluate this substitutability or complementarity interaction by considering the case of an individual who endogenously chooses to join a group and make decisions about index insurance. The presence of an individual in a risk sharing arrangement reduces his risk aversion, termed “Effective Risk Aversion” — a sufficient statistic for index decision making. Our analysis establishes that such reduction in risk aversion can lead to either reduced or increased take up of index insurance. These results provide alternative explanations for two empirical puzzles: unexpectedly low take-up for index insurance and demand being particularly low for the most risk averse. Experimental evidence based on data from a panel of field trials in India, lends support for several testable hypotheses that emerge from our baseline analysis. Research in Progress Investment Timing, Moral Hazard and Overconfidence Motivating Experts in Dynamic Settings |