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Time of the Essence

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  • Flavio Toxvaerd

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Abstract

In most industries, ranging from information systems development to construction, an overwhelming proportion of projects are delayed beyond estimated completion time. This fact constitutes somewhat of a puzzle for existing theory. The present paper studies project delays and optimal contracts under moral hazard in a setting with time to build. Within this setup, project delays are found to be most likely to happen at early stages of development, and intimately connected to the degree of commitment of the procurer and the class of contracts that can be enforced. The firstbest, optimal spot contracting and optimal long-term contract scenarios are analyzed, as well as commonly encountered additional constraints on the long-term contract.

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File URL: http://ratio.huji.ac.il/sites/default/files/publications/dp358.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 dp358.

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Length: 20 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:huj:dispap:dp358

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Keywords: deadlines; delivery; dynamic moral hazard;

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  1. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  2. Ted O'Donoghue & Matthew Rabin, 1997. "Incentives for Procrastinators," Discussion Papers 1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Flavio Toxvaerd, 2003. "A Theory of Optimal Deadlines," Discussion Paper Series dp357, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  4. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  5. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  6. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  7. Sobel, Joel, 1992. "How to Count to One Thousand," Economic Journal, Royal Economic Society, vol. 102(410), pages 1-8, January.
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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. Toxvaerd, Flavio, 2007. "A theory of optimal deadlines," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 493-513, February.

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