Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2022

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Setbacks, Shutdowns, and Overruns

Felix Zhiyu Feng*, Curtis Taylor, Mark Westerfield, Feifan Zhang

Last modified: 2022-05-19


We employ novel methods to investigate optimal project management in a setting plagued by unavoidable setbacks. The contractor can cover up delays from shirking either by making false claims of setbacks or by postponing the reports of real ones. The sponsor induces work and honest reporting via a soft deadline and a reward for completion. Late-stage setbacks trigger randomization between cancellation and extension. Thus the project may run far beyond its initial schedule, generat- ing arbitrarily large overruns, and yet be canceled. Absent commitment to randomize, the sponsor grants the contractor more time to complete the project.

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