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A Theory of Optimal Deadlines

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  • Flavio Toxvaerd

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Abstract

This paper sets forth a model of contracting for delivery in an environment with time to build and adverse selection. The optimal contract is derived and characterized and it takes the form of a deadline contract. Such a contract stipulates a deadline for delivery for each possible type of agent efficiency. The optimal contract induces inefficient delay by using delivery time as a screening device. Furthermore, rents are decreasing in the agent’s efficiency. In meeting the deadline, the agent’s effort is strictly increasing over time, due to discounting. It is shown that increasing the project’s gross value decreases delivery time, while the scale or difficulty of the project decreases it. Last, it is shown that the agent’s rents are increasing in both project difficulty and gross project value.

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File URL: http://ratio.huji.ac.il/sites/default/files/publications/dp357.pdf
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Bibliographic Info

Paper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp357.

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Length: 21 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:huj:dispap:dp357

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Keywords: deadlines; delivery time; time to build; adverse selection;

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References

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  1. Toxvaerd, Flavio, 2006. "Time of the essence," Journal of Economic Theory, Elsevier, vol. 129(1), pages 252-272, July.
  2. Tsur, Yacov & Zemel, Amos, 2002. "The Regulation of Environmental Innovations," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 242-260, September.
  3. Alex Cukierman & Zalman F. Shiffer, 1976. "Contracting for Optimal Delivery Time in Long-Term Projects," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 132-149, Spring.
  4. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  5. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  6. Gene M. Grossman & Carl Shapiro, 1986. "Optimal Dynamic R&D Programs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 581-593, Winter.
  7. Robert E. Lucas, Jr., 1971. "Optimal Management of a Research and Development Project," Management Science, INFORMS, vol. 17(11), pages 679-697, July.
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Cited by:
  1. Saez-Marti, Maria & Sjögren, Anna, 2004. "Deadlines and Distractions," Working Paper Series 618, Research Institute of Industrial Economics, revised 01 Jul 2004.
  2. Flavio Toxvaerd, 2004. "Time of the Essence," Discussion Paper Series dp358, The Center for the Study of Rationality, Hebrew University, Jerusalem.

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