Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects
AbstractWe study the optimal incentive scheme for a multistage project in which the agent privately observes intermediate progress. The optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date--if the agent reports progress at that date, then the principal gives him a relatively short hard deadline to complete the project--if progress is not reported at that date, then a probationary phase begins in which the project is randomly terminated at a constant rate until progress is reported. We explore several variants of the model with implications for optimal project design. In particular, we show that the principal benefits by imposing a small cost on the agent for submitting a progress report or by making the first stage of the project somewhat "harder" than the second.
CitationGreen, Brett, and Curtis R. Taylor. 2016. "Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects." American Economic Review, 106 (12): 3660-99. DOI: 10.1257/aer.20151181
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill