Optimal Incentive Contracts in Project Management

48 Pages Posted: 27 Dec 2018

See all articles by Milind Dawande

Milind Dawande

University of Texas at Dallas - Department of Information Systems & Operations Management

Ganesh Janakiraman

University of Texas at Dallas - Naveen Jindal School of Management

Anyan Qi

University of Texas at Dallas - Naveen Jindal School of Management

Qi Wu

Case Western Reserve University, Weatherhead School of Management

Date Written: November 16, 2018

Abstract

Motivated by the ever-growing complexity of projects and the consistent trend of outsourcing of individual tasks or components, we study the contract-design problem faced by a firm (or organization) for executing a project consisting of multiple tasks, each of which is performed by an individual contractor whose efforts (work-rates) are not observable. While the contractors incur costs continuously during the course of their tasks, the firm realizes its reward or revenue only when the entire project is (i.e., all tasks are) completed. The firm's contract-design decisions and the contractors' effort-level decisions are all governed by the goals of maximizing the respective party's expected discounted profit. We adopt the framework in Kwon et al. (2010a) and Chen et al. (2015), and derive optimal contracts for both parallel projects (tasks can be performed in parallel) and sequential projects (tasks have to be performed sequentially). The simplicity of the contracts we obtain suggests that there is potential for designing profit-maximizing contracts without paying a price in terms of contract complexity.

Keywords: Project Management, Contract Design, Dynamic Programming, Unobservable Effort

JEL Classification: D86, L24

Suggested Citation

Dawande, Milind and Janakiraman, Ganesh and Qi, Anyan and Wu, Qi, Optimal Incentive Contracts in Project Management (November 16, 2018). Available at SSRN: https://ssrn.com/abstract=3016515 or http://dx.doi.org/10.2139/ssrn.3016515

Milind Dawande

University of Texas at Dallas - Department of Information Systems & Operations Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Ganesh Janakiraman

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Anyan Qi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Qi Wu

Case Western Reserve University, Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
65
Abstract Views
457
rank
354,806
PlumX Metrics