A Theory of Optimal Deadlines

20 Pages Posted: 8 Dec 2003

See all articles by Flavio Toxvaerd

Flavio Toxvaerd

University of Cambridge - Faculty of Economics

Date Written: November 2003

Abstract

This paper sets forth a model of contracting for delivery in an environment with time to build and adverse selection. The optimal contract is derived and characterized and it takes the form of a deadline contract. Such a contract stipulates a deadline for delivery for each possible type of agent efficiency. The optimal contract induces inefficient delay by using delivery time as a screening device. Furthermore, rents are decreasing in the agent's efficiency. In meeting the deadline, the agent's effort is strictly increasing over time, due to discounting. It is shown that increasing the project's gross value decreases delivery time, while the scale or difficulty of the project decreases it. Last, it is shown that the agent's rents are increasing in both project difficulty and gross project value.

Keywords: Deadlines, delivery time, time to build, adverse selection.

JEL Classification: L10, L20

Suggested Citation

Toxvaerd, Flavio, A Theory of Optimal Deadlines (November 2003). Available at SSRN: https://ssrn.com/abstract=469481 or http://dx.doi.org/10.2139/ssrn.469481

Flavio Toxvaerd (Contact Author)

University of Cambridge - Faculty of Economics ( email )

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