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

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. Self-reported progress plays a crucial (but non-stationary) role in implementation. 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 in order to submit a progress report or by making the first stage of the project somewhat "harder" than the second. On the other hand, the principal does strictly worse by impairing the agent's ability to observe his own progress.JEL Classification: J41, L14, M55, D82

Only Time Will Tell: A Theory of Deferred Compensation

“…In future work, it would be interesting to extend our one-time action setup by allowing the agent to take on subsequent actions. One can envision that these follow-up actions do not only have persistent effects themselves, but are also state contingent: For example, the follow-up action "restructuring and downsizing" may only be required after initial failure, or the action "develop product" only available after a patent has been granted (see, e.g., Green and Taylor (2016) for a related setting). In such settings, for each history h t , one needs to account for all previously exerted action choices and keep track of a multidimensional vector of likelihood ratios.…”

Only Time Will Tell: A Theory of Deferred Compensation

“…One can envision that these follow-up actions do not only have persistent effects themselves, but are also state contingent: For example, the follow-up action "restructuring and downsizing" may only be required after initial failure, or the action "develop product" only available after a patent has been granted (see, e.g., Green and Taylor (2016) for a related setting). In such settings, for each history h t , one needs to account for all previously exerted action choices and keep track of a multidimensional vector of likelihood ratios.…”

Designing Dynamic Research Contests

“…In particular, in a broad class of contests it is optimal to stop the contest only once a certain number of agents had a success and to share the prize between them. 27 Along similar lines Green and Taylor (2016) consider the role of breakthroughs in a single-agent contracting environment. In contrast to our framework, the research outcome can be contracted upon and the problem the principal faces is how to optimally induce effort over time using a first deadline for the breakthrough, a second deadline for the final outcome and a monetary transfer.…”