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Deadlines in Product Development

Juanjuan Zhang

Massachusetts Institute of Technology (MIT) - Sloan School of Management

July 13, 2015

Management Science, Forthcoming

Deadlines are common in product development and are often felt to be too harsh - many development efforts are still worth continuing at the time of mandated termination. We examine the value of 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. To motivate continued effort, the firm must promise the agent a generous reward if success is achieved during the late stage of development. However, rewarding late success undermines effort incentives in the early stage. The firm may find it more profitable to impose a hard, early deadline to eliminate the agent's dynamic incentive to procrastinate. We derive conditions under which the firm should impose such deadlines.

Number of Pages in PDF File: 39

Keywords: deadline; product development; incentive; learning; dynamic moral hazard; agency theory

JEL Classification: D82, D83, M31, M37

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Date posted: July 31, 2012 ; Last revised: July 14, 2015

Suggested Citation

Zhang, Juanjuan, Deadlines in Product Development (July 13, 2015). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2120227 or http://dx.doi.org/10.2139/ssrn.2120227

Contact Information

Juanjuan Zhang (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
Cambridge, MA 02142
United States
HOME PAGE: http://jjzhang.scripts.mit.edu
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