Setbacks, Shutdowns, and Overruns

Felix Zhiyu Feng, Curtis R. Taylor, Mark M. Westerfield and Feifan Zhang

Econometrica, 2024, vol. 92, issue 3, 815-847

Abstract: We investigate optimal project management in a setting plagued by an indefinite number of setbacks that are discovered en route to project completion. The contractor can cover up delays in progress due to shirking either by making false claims of setbacks or by postponing the reports of real ones. The sponsor optimally induces work and honest reporting via a soft deadline and a reward for completion that specifies a bonus for early delivery. Late‐stage setbacks trigger randomization between minimally feasible project extension and (inefficient) cancellation. Because extensions may be granted repeatedly, arbitrarily large overruns in schedule and budget are possible after which the project may still be canceled.

Date: 2024
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