Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects

49 Pages Posted: 19 Mar 2015 Last revised: 29 Mar 2017

See all articles by Brett Green

Brett Green

Washington University in St. Louis - John M. Olin Business School

Curtis R. Taylor

Duke University - Department of Economics

Date Written: June 3, 2016

Abstract

We 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. Self-reported progress plays a crucial (but non-stationary) role in implementation. 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 in order to submit a progress report or by making the first stage of the project somewhat "harder" than the second. On the other hand, the principal does strictly worse by impairing the agent's ability to observe his own progress.

Keywords: Dynamic Contracting, Project Management, Moral Hazard, Private Information, Progress Reports, Strategic Communication, Milestones, R&D

JEL Classification: J41, D82, L14, M55

Suggested Citation

Green, Brett and Taylor, Curtis R., Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects (June 3, 2016). American Economic Review, 2016, 106(12), 3660-99, Available at SSRN: https://ssrn.com/abstract=2579730 or http://dx.doi.org/10.2139/ssrn.2579730

Brett Green (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Curtis R. Taylor

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1827 (Phone)
919-684-8974 (Fax)

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