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Getting It Done: Dynamic Incentives To Complete A Project

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  • Robin Mason
  • Juuso Välimäki

Abstract

A principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. We characterize the contracts that the principal sets, with and without commitment. With full commitment, the contract involves the agent's value and wage declining over time, in order to give the agent incentives to exert effort. The best sequentially rational equilibrium for the principal also involves the agent's wage declining over time, while the worst sequentially rational equilibrium for the principal has a constant wage (and is in fact the unique stationary equilibrium). The best (weakly) renegotiation-proof equilibrium for the principal is achieved by a constant wage that maximizes the principal's payoff, conditional on wages being constant. We compare these solutions to the efficient outcome.

Suggested Citation

  • Robin Mason & Juuso Välimäki, 2015. "Getting It Done: Dynamic Incentives To Complete A Project," Journal of the European Economic Association, European Economic Association, vol. 13(1), pages 62-97, February.
    • Handle: RePEc:bla:jeurec:v:13:y:2015:i:1:p:62-97
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    File URL: http://hdl.handle.net/10.1111/jeea.12126
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    Cited by:

    1. Alessandro Bonatti & Heikki Rantakari, 2016. "The Politics of Compromise," American Economic Review, American Economic Association, vol. 106(2), pages 229-259, February.
    2. Mayer, Simon, 2022. "Financing breakthroughs under failure risk," Journal of Financial Economics, Elsevier, vol. 144(3), pages 807-848.
    3. Chia‐Hui Chen & Junichiro Ishida, 2018. "Dynamic performance evaluation with deadlines: The role of commitment," Journal of Industrial Economics, Wiley Blackwell, vol. 66(2), pages 377-422, June.
    4. Panu Poutvaara & Tuomas Takalo & Andreas Wagener, 2017. "The Optimal Duration of Contracts," CESifo Working Paper Series 6808, CESifo.
    5. Bhattacharjee, Swagata, 2022. "Dynamic contracting for innovation under ambiguity," Games and Economic Behavior, Elsevier, vol. 132(C), pages 534-552.
    6. Brett Green & Curtis R. Taylor, 2016. "Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects," American Economic Review, American Economic Association, vol. 106(12), pages 3660-3699, December.
    7. Cary Deck & Erik O. Kimbrough, 2017. "Experimenting with Contests for Experimentation," Southern Economic Journal, John Wiley & Sons, vol. 84(2), pages 391-406, October.
    8. Rodivilov, Alexander, 2022. "Monitoring innovation," Games and Economic Behavior, Elsevier, vol. 135(C), pages 297-326.
    9. Swagata Bhattacharjee, 2019. "Dynamic Contracting for Innovation Under Ambiguity," Working Papers 1022, Ashoka University, Department of Economics, revised Aug 2019.
    10. Jakša Cvitanić & George Georgiadis, 2016. "Achieving Efficiency in Dynamic Contribution Games," American Economic Journal: Microeconomics, American Economic Association, vol. 8(4), pages 309-342, November.
    11. Altan, Baṣak, 2019. "Dynamic moral hazard with sequential tasks," Economics Letters, Elsevier, vol. 183(C), pages 1-1.
    12. Xi Chen & Yu Chen & Xuhu Wan, 2018. "Delegated Project Search," Graz Economics Papers 2018-11, University of Graz, Department of Economics.
    13. Chade, Hector & Kovrijnykh, Natalia, 2016. "Delegated information acquisition with moral hazard," Journal of Economic Theory, Elsevier, vol. 162(C), pages 55-92.
    14. Zhaolin Li & Steven Q. Lu & Jennifer K. Ryan & Daewon Sun, 2021. "Impact of Organizational Structure on Development Strategy under Equity‐Based Incentives," Production and Operations Management, Production and Operations Management Society, vol. 30(4), pages 984-996, April.
    15. Peng Sun & Feng Tian, 2018. "Optimal Contract to Induce Continued Effort," Management Science, INFORMS, vol. 64(9), pages 4193-4217, September.

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