Coordination and Incentive Contracts in Project Management Under Asymmetric Information
32 Pages Posted: 15 Jul 2006
Date Written: December 15, 2005
We study the problem of the manager of a project consisting of two sub-projects or tasks which are outsourced to different subcontractors. The project manager earns more revenue from the project if it is completed faster, but he cannot observe how hard subcontractors work, only the stochastic duration of their tasks. We derive the optimal linear incentive contracts to offer to the subcontractors when the tasks are conducted in series or in parallel.
We compare them to the fixed-price contracts often encountered in practice, and discuss when incentive contracts lead to bigger performance improvement. We characterize how the incentive contracts vary with the subcontractors' risk aversion and cost of effort, the marginal effect of subcontractor effort, and the variability of task durations. We find that this dependence is sometimes counter-intuitive in nature. For instance, for parallel tasks, if the first agent's task is on the critical path and his variability increases, the project manager should induce the first agent to work less hard and the second agent to work harder.
Keywords: project management, inventive contracting, asymmetric information, moral hazard
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Procurement in Supply Chains When the End-Product Exhibits the 'Weakest Link' Property
By Stanley Baiman, Serguei Netessine, ...
Co-opetition and Investment for Supply-Chain Resilience
By Nitin Bakshi and Paul R. Kleindorfer
An Incentive Effect of Multiple Sourcing
By Stanley Baiman and Serguei Netessine
Incomplete Incentive Contracts Under Ambiguity and Complexity
Resource-Constrained Project Scheduling for Timely Project Completion with Stochastic Activity Durations
By Francisco Ballestin and R. Leus
A Novel Class of Scheduling Policies for the Stochastic Resource-Constrained Project Scheduling Problem
By Behzad Ashtiani, R. Leus, ...
Project Management with Delayed Payments
By H. Dharma Kwon, Kevin F. Mccardle, ...