We consider the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial e.ort and to report her private information truthfully. The optimal policy is to underinvest (compared to .rst-best) and provide weak incentive pay in low-quality projects and overinvest (compared to .rst-best) and provide strong incentive pay in high-quality projects. We also show that, unlike the standard agency model, uncertainty and incentives can be positively related.
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