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  3. American Economic Review
  4. December 2016
  5. Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects

Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects

  • Brett Green
  • Curtis R. Taylor
American Economic Review
vol. 106, no. 12, December 2016
(pp. 3660-99)
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Abstract

We study the optimal incentive scheme for a multistage project in which the agent privately observes intermediate progress. The optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date--if the agent reports progress at that date, then the principal gives him a relatively short hard deadline to complete the project--if progress is not reported at that date, then a probationary phase begins in which the project is randomly terminated at a constant rate until progress is reported. We explore several variants of the model with implications for optimal project design. In particular, we show that the principal benefits by imposing a small cost on the agent for submitting a progress report or by making the first stage of the project somewhat "harder" than the second.

Citation

Green, Brett, and Curtis R. Taylor. 2016. "Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects." American Economic Review, 106 (12): 3660-99. DOI: 10.1257/aer.20151181

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • D86 Economics of Contract: Theory
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill