Rational Delay of Effort in Projects with Uncertain Requirements
37 Pages Posted: 23 Jul 2015 Last revised: 18 Mar 2018
Date Written: March 14, 2018
We analyze a dynamic moral hazard problem in teams with imperfect monitoring in continuous time. In the model, players are working together to achieve a breakthrough in a project while facing a deadline. The effort needed to achieve a breakthrough is unknown but players have a common prior about its distribution. This makes the model very flexible, since the distribution over the required effort for a breakthrough can model different types of projects.
We characterize the equilibrium and the welfare-maximizing effort path for general distributions of this breakthrough effort and show that three effects are at work: free-riding (i.e., working less), an encouragement effect (i.e., working more), similar to Bolton and Harris (1999), and a delay of effort (i.e., working later).
This encouragement effect increases or decreases the amount of work players put into the project depending on the type of uncertainty faced. Furthermore, the delay of effort explains the frequently observed last-minute rush before a deadline as a result of the actions of not only rational but also welfare-maximizing players.
Keywords: Moral hazard in teams, public good provision, procrastination, projects, strategic experimentation
JEL Classification: C72, C73, D81, D82, D83, H41
Suggested Citation: Suggested Citation