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This paper presents one of the first systematic treatments of economic incentives in the management of academic research and major inefficiencies in common funding mechanisms. Building on well-known but unusual attributes of research whereby the research payoff is only the “"best”" of scientists'’ outputs, payoffs are highly uncertain, asymmetric information exists on scientists'’ effort, and scientists'’ are more risk averse than administrators, we consider how incentives should be structured to elicit optimal research effort and payoffs using a principal-agent model with heterogenous ability across scientists. We then conduct a systematic analysis of the implications from the model for the three major forms of agricultural experiment station funding--external grant programs, incentive contracts with outsiders, and formula/program funding. External competitive grant programs are shown to be a relatively inefficient funding mechanism.


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