IDEAS home Printed from https://ideas.repec.org/p/yca/wpaper/2007_2.html
   My bibliography  Save this paper

Optimal Incentives in Dynamic Multiple Project Contracts

Author

Listed:
  • Josepa Miquel-Florensa

    () (Department of Economics, York University)

Abstract

We design a multiple project-funding contract that provides optimal incentives to recipients, in a setting where externalities exist among the multiple projects and where donors and recipients may differ in their valuation of the projects. To do so, we study optimal incentive payments in a dynamic principal-agent framework with focus on two-project contracts. The principal cannot observe the agent’s investment, but only completed projects. We consider principals that cannot commit to contract termination before completion of the projects; we assume that the contract does not end until both projects are accomplished. We derive the optimal contract for each possible combination of principal-agentproject characteristics to find that projects should be undertaken simultaneously when value externalities among them are large, i.e. when completing both projects gives the recipient significantly more utility than the sum of the projects’ independent values. The principal’s utility maximizing strategy, when technical externalities among projects are important, is a sequential contract that starts with the project that generates the externality. We find that differences in project valuation between agents and recipients may, in some cases, lead to inefficient contracts, when in other situations the ability of the principal to choose the timing of the project competition may be a safety clause for him.

Suggested Citation

  • Josepa Miquel-Florensa, 2007. "Optimal Incentives in Dynamic Multiple Project Contracts," Working Papers 2007_2, York University, Department of Economics.
  • Handle: RePEc:yca:wpaper:2007_2
    as

    Download full text from publisher

    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2007/Multiple_Miquel-Florensa.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-732, May.
    2. Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
    3. Svensson, Jakob, 2003. "Why conditional aid does not work and what can be done about it?," Journal of Development Economics, Elsevier, vol. 70(2), pages 381-402, April.
    4. Dirk Bergemann & Ulrigh Hege, 2005. "The Financing of Innovation: Learning and Stopping," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 719-752, Winter.
    5. Sinclair-Desgagne, Bernard, 1999. "How to Restore Higher-Powered Incentives in Multitask Agencies," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(2), pages 418-433, July.
    6. Peter S. Heller, 2005. "Pity the Finance Minister; Issues in Managing a Substantial Scaling-Up of Aid Flows," IMF Working Papers 05/180, International Monetary Fund.
    7. Laux, Christian, 2001. "Limited-Liability and Incentive Contracting with Multiple Projects," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 514-526, Autumn.
    8. Andreoni, James, 1990. "Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving?," Economic Journal, Royal Economic Society, vol. 100(401), pages 464-477, June.
    9. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
    10. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
    11. 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.
    12. Arvind Subramanian & Raghuram Rajan, 2005. "What Undermines Aid’s Impact on Growth?," IMF Working Papers 05/126, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martin Szydlowski, 2014. "Incentives, Project Choice, and Dynamic Multitasking," 2014 Meeting Papers 1240, Society for Economic Dynamics.
    2. Martin Szydlowski, 2012. "Incentives, Project Choice and Dynamic Multitasking," Discussion Papers 1525, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

    More about this item

    Keywords

    Dynamic Contracts; Multitask; Foreign Aid;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • F35 - International Economics - - International Finance - - - Foreign Aid

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:yca:wpaper:2007_2. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Support). General contact details of provider: http://edirc.repec.org/data/dyorkca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.