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Setbacks, Shutdowns, and Overruns

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

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.

Suggested Citation

  • Felix Zhiyu Feng & Curtis R. Taylor & Mark M. Westerfield & Feifan Zhang, 2024. "Setbacks, Shutdowns, and Overruns," Econometrica, Econometric Society, vol. 92(3), pages 815-847, May.
    • Handle: RePEc:wly:emetrp:v:92:y:2024:i:3:p:815-847
    DOI: 10.3982/ECTA21548
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