Time of the Essence

Flavio Toxvaerd

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 likelyto happen at early stages of development, and intimately connected to the degree ofcommitment 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, aswell as commonly encountered additional constraints on the long-term contract.

May, 2004
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