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A theory of optimal deadlines

  • Toxvaerd, Flavio

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://www.sciencedirect.com/science/article/B6V85-4JGJJ0B-3/2/95e2cd242edb8c52344df04b731790c1
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 2 (February)
Pages: 493-513

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:2:p:493-513
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Gene M. Grossman & Carl Shapiro, 1985. "Optimal Dynamic R&D Programs," NBER Working Papers 1658, National Bureau of Economic Research, Inc.
  2. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  3. Flavio Toxvaerd, 2004. "Time of the Essence," Discussion Paper Series dp358, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
  4. 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.
  5. Robert E. Lucas, Jr., 1971. "Optimal Management of a Research and Development Project," Management Science, INFORMS, vol. 17(11), pages 679-697, July.
  6. 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.
  7. Tsur, Yacov & Zemel, Amos, 2002. "The Regulation of Environmental Innovations," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 242-260, September.
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