Setbacks, Shutdowns, and Overruns

55 Pages Posted: 8 Feb 2021 Last revised: 30 Jun 2021

See all articles by Felix Zhiyu Feng

Felix Zhiyu Feng

University of Washington - Michael G. Foster School of Business

Curtis R. Taylor

Duke University - Department of Economics

Mark M. Westerfield

University of Washington

Feifan Zhang

Duke University - Department of Economics

Date Written: June 28, 2021

Abstract

We employ novel methods to investigate optimal project management in a setting plagued by unavoidable setbacks. The contractor can cover up delays from shirking either by making false claims of setbacks or by postponing the reports of real ones. The sponsor induces work and honest reporting via a soft deadline and a reward for completion. Late-stage setbacks trigger randomization between cancellation and extension. Thus the project may run far beyond its initial schedule, generating arbitrarily large overruns, and yet be canceled. Absent commitment to randomize, the sponsor grants the contractor more time to complete the project.

Keywords: Project Management, Dynamic Agency, Soft Deadline, Cost-Plus-Award-Fee Contract, Schedule Slippage

JEL Classification: C72, D21, D86, M11

Suggested Citation

Feng, Felix and Taylor, Curtis R. and Westerfield, Mark M. and Zhang, Feifan, Setbacks, Shutdowns, and Overruns (June 28, 2021). Available at SSRN: https://ssrn.com/abstract=3775340 or http://dx.doi.org/10.2139/ssrn.3775340

Felix Feng (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
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)

Mark M. Westerfield

University of Washington ( email )

Box 353200
Seattle, WA 98195
United States

HOME PAGE: http://www.markwesterfield.com

Feifan Zhang

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

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