The Distortion of Effort in Staged Development Across Interim Outputs

Abstract

How might the use of staged development distort the effort invested in the interim outputs of a project? Firms often use staged development as a response to project uncertainty. In contrast to fully committing to a project, allows for the early termination of unpromising projects, saving scarce firm resources. However, it can also distort the incentives to exert effort towards the first stage of development relative to later stages, to the potential detriment of the overall project. I provide a simple model illustrating the relationship between staged development and agent effort across stages. In addition, I test the implications of my theory using an empirical dataset of television programs. This paper contributes to the growing literature exploring the challenges of using staged development within firms.

Keywords: Staged Development, Commitment, Real Options, Incentives, Innovation, Entrepreneurship