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Solving Problems of Unknown Difficulty

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  • Nicholas Wu

Abstract

This paper studies how uncertainty about problem difficulty shapes problem-solving strategies. I develop a dynamic model where an agent solves a problem by brainstorming approaches of unknown quality and allocating a fixed effort budget among them. Success arrives from spending effort pursuing good approaches, at a rate determined by the unknown problem difficulty. The agent balances costly exploration (expanding the set of approaches) with exploitation (pursuing existing approaches). Failures could signal either a bad idea or a hard problem, and this uncertainty generates novel dynamics: optimal search alternates between trying new approaches and revisiting previously abandoned ones. I then examine a principal-agent environment, where moral hazard arises on the intensive margin: how the agent explores. Dynamic commitment leads contracts to frontload incentives, which can be counteracted by the presence of learning. The framework reflects scientific discovery, product development, and other creative work, providing insights into innovation and organizational design.

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  • Nicholas Wu, 2026. "Solving Problems of Unknown Difficulty," Papers 2604.00156, arXiv.org.
  • Handle: RePEc:arx:papers:2604.00156
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    References listed on IDEAS

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    1. Alessandro Lizzeri & Eran Shmaya & Leeat Yariv, 2024. "Disentangling Exploration from Exploitation," Working Papers 334, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. Keller, Godfrey & Oldale, Alison, 2003. "Branching bandits: a sequential search process with correlated pay-offs," Journal of Economic Theory, Elsevier, vol. 113(2), pages 302-315, December.
    3. Christoph Carnehl & Johannes Schneider, 2023. "On Risk and Time Pressure: When to Think and When to Do," Journal of the European Economic Association, European Economic Association, vol. 21(1), pages 1-47.
    4. Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 957-984.
    5. Christoph Carnehl & Johannes Schneider, 2025. "A Quest for Knowledge," Econometrica, Econometric Society, vol. 93(2), pages 623-659, March.
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