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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.

Suggested Citation

  • Flavio Toxvaerd, 2004. "Time of the Essence," Discussion Paper Series dp358, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    • Handle: RePEc:huj:dispap:dp358
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    References listed on IDEAS

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    1. Saez-Marti, Maria & Sjögren, Anna, 2008. "Deadlines and distractions," Journal of Economic Theory, Elsevier, vol. 143(1), pages 153-176, November.
    2. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 599-617.
    3. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    4. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
    5. 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.
    6. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
    7. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-1190, September.
    8. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
    9. Richard A. Lambert, 1983. "Long-Term Contracts and Moral Hazard," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 441-452, Autumn.
    10. Sobel, Joel, 1992. "How to Count to One Thousand," Economic Journal, Royal Economic Society, vol. 102(410), pages 1-8, January.
    11. Toxvaerd, Flavio, 2007. "A theory of optimal deadlines," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 493-513, February.
    12. Musgrove, Philip, 1985. "Why Everything Takes 2.71828 . . . Times as Long as Expected," American Economic Review, American Economic Association, vol. 75(1), pages 250-252, March.
    13. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives for Procrastinators," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 769-816.
    14. 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.
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    Citations

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    Cited by:

    1. Saez-Marti, Maria & Sjögren, Anna, 2008. "Deadlines and distractions," Journal of Economic Theory, Elsevier, vol. 143(1), pages 153-176, November.
    2. Katolnik, Svetlana & Schöndube, Jens Robert, 2015. "Don't Kill the Goose that Lays the Golden Eggs: Strategic Delay in Project Completion," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113046, Verein für Socialpolitik / German Economic Association.
    3. Katolnik, Svetlana & Schöndube, Jens Robert, 2014. "Don't Kill the Goose that Lays the Golden Eggs: Strategic Delay in Project Completion," Hannover Economic Papers (HEP) dp-533, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    4. Toxvaerd, Flavio, 2007. "A theory of optimal deadlines," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 493-513, February.
    5. Ulbricht, Robert, 2016. "Optimal delegated search with adverse selection and moral hazard," Theoretical Economics, Econometric Society, vol. 11(1), January.
    6. Aristotelis Boukouras, 2015. "Separation of Ownership and Control: Delegation as a Commitment Device," Discussion Papers in Economics 15/02, Department of Economics, University of Leicester.
    7. Chade, Hector & Kovrijnykh, Natalia, 2016. "Delegated information acquisition with moral hazard," Journal of Economic Theory, Elsevier, vol. 162(C), pages 55-92.

    More about this item

    Keywords

    deadlines; delivery; dynamic moral hazard;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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