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Author: Milind Dawande
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
Motivated by the ever-growing complexity of projects and the consistent trend of outsourcing of individual tasks or components, we study the contract-design problem faced by a firm (or organization) for executing a project consisting of multiple tasks, each of which is performed by an individual contractor whose efforts (work-rates) are not observable. While the contractors incur costs continuously during the course of their tasks, the firm realizes its reward or revenue only when the entire project is (i.e., all tasks are) completed. The firm's contract-design decisions and the contractors' effort-level decisions are all governed by the goals of maximizing the respective party's expected discounted profit. We adopt the framework in Kwon et al. (2010a) and Chen et al. (2015), and derive optimal contracts for both parallel projects (tasks can be performed in parallel) and sequential projects (tasks have to be performed sequentially). The simplicity of the contracts we obtain suggests that there is potential for designing profit-maximizing contracts without paying a price in terms of contract complexity.
Author: Milind Dawande
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
Motivated by the ever-growing complexity of projects and the consistent trend of outsourcing of individual tasks or components, we study the contract-design problem faced by a firm (or organization) for executing a project consisting of multiple tasks, each of which is performed by an individual contractor whose efforts (work-rates) are not observable. While the contractors incur costs continuously during the course of their tasks, the firm realizes its reward or revenue only when the entire project is (i.e., all tasks are) completed. The firm's contract-design decisions and the contractors' effort-level decisions are all governed by the goals of maximizing the respective party's expected discounted profit. We adopt the framework in Kwon et al. (2010a) and Chen et al. (2015), and derive optimal contracts for both parallel projects (tasks can be performed in parallel) and sequential projects (tasks have to be performed sequentially). The simplicity of the contracts we obtain suggests that there is potential for designing profit-maximizing contracts without paying a price in terms of contract complexity.
Author: Murat Bayiz
Publisher:
ISBN:
Category : Project management
Languages : en
Pages : 294
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Author: Kevin C. Murdock
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
I study the role of intrinsic motivation on optimal incentive contracts. Agents engage in efforts to generate projects with both financial return and intrinsic value to the agent. In a neutral environment, where intrinsic motivation has no direct effect on the disutility of effort, static contracts are unaffected by intrinsic motivation. In contrast, the firm's profits from an implicit contract are increasing in the degree to which the agent is intrinsically motivated, showing that implicit contracts and intrinsic motivation are complements. The results are further extended to consider the role of multiple implicit contracts and product market strategy.
Author: Murat Bayiz
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
We study the problem of the manager of a project consisting of two sub-projects or tasks which are outsourced to different subcontractors. The project manager earns more revenue from the project if it is completed faster, but he cannot observe how hard subcontractors work, only the stochastic duration of their tasks. We derive the optimal linear incentive contracts to offer to the subcontractors when the tasks are conducted in series or in parallel. We compare them to the fixed-price contracts often encountered in practice, and discuss when incentive contracts lead to bigger performance improvement. We characterize how the incentive contracts vary with the subcontractors' risk aversion and cost of effort, the marginal effect of subcontractor effort, and the variability of task durations. We find that this dependence is sometimes counter-intuitive in nature. For instance, for parallel tasks, if the first agent's task is on the critical path and his variability increases, the project manager should induce the first agent to work less hard and the second agent to work harder.
Author: Joseph L. Midler
Publisher:
ISBN:
Category : Contracting out
Languages : en
Pages : 356
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Book Description
Several versions of the negotiation of the parameters of incentive contracts between a government and private contractors are formulated as game theoretical models. This framework permits one focus upon a number of aspects that have previously been overlooked such as the interaction of the participants, the lack of domination by one side or the other, constraints upon the player's strategies, and the possible joint interests of the one party in the other player's outcome. Computational methods of solution are suggested. (Author).
Author: Svenja C. Sommer
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Many novel projects are characterized by ambiguity (impossibility to recognize all influence variables and to foresee all possible events) and complexity (interaction of many performance influence variables, making the overall performance difficult to estimate). Two fundamental approaches to project management under these conditions have been identified: Selectionism, or pursuing multiple approaches independently of one another and picking the best one ex post, and trial & error learning, or flexibly adjusting to new information about the environment as it emerges. While the actions to be taken under the selectionist approach can be defined at the outset, and thus standard contracting theory applies, trial & error learning involves taking actions after ambiguity has been resolved, making it inherently difficult to set incentives for managers. Actions and targets cannot be specified at the outset, since they would no longer be optimal at the time the actions should be executed. In a search model in a complex performance landscape, this paper first shows that trial & error learning is more attractive than selectionism when ambiguity and high complexity combine. Second, for this situation of trial & error learning, we construct incomplete contracts between a principal (e.g., the firm) and an agent (e.g., a project manager) that can re-instate optimal incentives for the agent. This is achieved by a priori defining time points and aspects of re-negotiation, depending on what each party learns. As the project manager, as an employee, is ambiguity averse, he must be protected from unforeseeable variations in his compensation. The principal, in contrast, is willing to accept ambiguity, and the incomplete contract offers him a means to optimally re-direct the agent's actions in return or insuring the agent against payment ambiguity.
Author: Robert A. J. Dur
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Author: Praveen Kumar
Publisher:
ISBN:
Category :
Languages : en
Pages :
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We examine information aggregation regarding industry capital productivity from privately informed managers in a dynamic model with optimal incentive contracts. Information cascades always occur if managers enjoy limited liability: when beliefs regarding productivity become endogenously extreme (optimistic or pessimistic), learning stops. There is no learning if initial beliefs are extreme, or if agency conflicts are severe. In contrast to the literature, cascades occur even when signals have unbounded precision or when there are rich action spaces. Relaxing limited liability constraints is not sufficient to avoid cascades; we provide sufficient conditions for efficient information aggregation through incentive contracts.
Author: Joel S. Demski
Publisher:
ISBN:
Category :
Languages : en
Pages : 58
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Author: Kevin Murdock
Publisher:
ISBN:
Category : Incentives in industry
Languages : en
Pages : 30
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