Contracting for Optimal Delivery Time in Long-Term Projects

Alex Cukierman and Zalman F. Shiffer

Bell Journal of Economics, 1976, vol. 7, issue 1, 132-149

Abstract: This paper deals with the effects of commonly used payment schedules on the execution of investment projects which are produced to order over prolonged periods of time. It is shown that even if the parties settle on execution terms which maximize their joint benefits (assumed to reflect authentic social values), the contractor will generally be able to secure additional gain, while creating social waste, by shifting the delivery date over time. Moreover, when payments are tied to work progress, he may also have an incentive to deploy inputs inefficiently over time for any given termination date. Some methods which eliminate those diseconomies, while preserving efficient features of existing payment schedules, are developed under increasingly complex assumptions concerning the project's nature. These methods are also adapted for an inflationary environment.

Date: 1976
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