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Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects

  • Author(s): Green, BS
  • Taylor, CR
  • et al.
Abstract

We study the optimal incentive schemes for multistage projects. Staged financing, pervasive in both venture capital and research grants, arises as a feature of the optimal contract. The nature of progress plays an important role. When progress is tangible, incentives are provided through a series of deadlines and a reward scheme that decreases over time. Early progress in one stage gives the agent more time and funding to complete the next one. When progress is intangible, unverifiable progress reports are used despite the fact that the information in the report has no social value. The optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date – if the agent reports progress at that date, then the principal gives him a relatively short deadline to complete the project – if not, then a probationary phase begins in which the project is terminated at a constant rate until progress is reported. We explore the implications for welfare and optimal project design.

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