Management Science, Forthcoming
39 Pages Posted: 31 Jul 2012 Last revised: 14 Jul 2015
Date Written: July 13, 2015
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.
Keywords: deadline; product development; incentive; learning; dynamic moral hazard; agency theory
JEL Classification: D82, D83, M31, M37
Suggested Citation: Suggested Citation