Coordination and Incentive Contracts in Project Management Under Asymmetric Information

32 Pages Posted: 15 Jul 2006

See all articles by Murat Bayiz

Murat Bayiz

University of Southern California - Marshall School of Business

Charles J. Corbett

University of California, Los Angeles - Anderson School of Business

Date Written: December 15, 2005

Abstract

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

Bayiz, Murat and Corbett, Charles J., Coordination and Incentive Contracts in Project Management Under Asymmetric Information (December 15, 2005). Available at SSRN: https://ssrn.com/abstract=914227 or http://dx.doi.org/10.2139/ssrn.914227

Murat Bayiz (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Charles J. Corbett

University of California, Los Angeles - Anderson School of Business ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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