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

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