Deadlines in Product Development
Massachusetts Institute of Technology (MIT) - Sloan School of Management
January 26, 2014
MIT Sloan Research Paper No. 5109-14
Deadlines are common in product development. However, deadlines are often too stringent – many development efforts are still worth continuing at the time of termination. We examine the value of stringent deadlines from the agency-theoretic perspective. We consider a firm that pays an agent to lead product development activities. The chance of success depends on the viability of the project and the effort of the agent. As the project proceeds without success, doubts grow as to whether the project is viable. The firm must offer the agent a generous reward for success to motivate continued effort. However, the prospect of earning a generous reward in the future undermines current effort incentives. The firm may find it more profitable to impose an early deadline to eliminate the agent’s dynamic incentives to shirk. We derive conditions under which the firm should impose deadlines.
Number of Pages in PDF File: 39
Keywords: deadline, product development, incentives, learning, agency theory
JEL Classification: D82, D83, M31, M37
Date posted: July 31, 2012 ; Last revised: August 29, 2014
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