The financial crisis of 2008 has many causes, with the role of executive compensation in creating excessive risk taking being frequently cited in the press and by policy makers as a leading candidate. The evidence for or against is scarce. This paper assembles panel data on 117 financial firms...

We explore when and how to reward failure in a dynamic principal-agent relationship with experimentation. The agent receives flow rents from experimentation, and divides his time between searching for evidence of success and failure about the underlying project. The principal commits in advance...