Time of the Essence
19 Pages Posted: 29 Mar 2004
Date Written: March 2004
In most industries, ranging from information systems development to construction, an overwhelming proportion of projects are delayed beyond estimated completion time. This fact constitutes somewhat of a puzzle for existing theory. The present paper studies project delays and optimal contracts under moral hazard in a setting with time to build. Within this setup, project delays are found to be most likely to happen at early stages of development, and intimately connected to the degree of commitment of the procurer and the class of contracts that can be enforced. The first-best, optimal spot contracting and optimal long-term contract scenarios are analyzed, as well as commonly encountered additional constraints on the long-term contract.
Keywords: Deadlines, delivery, dynamic moral hazard
JEL Classification: D82, D92
Suggested Citation: Suggested Citation