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Project Design with Limited Commitment and Teams

Wednesday 11th June 2014, 4.00pm

Graham Wallace Room, LSE

Christopher S. Tang

Edward W. Carter Professor of Business Administration, UCLA Anderson School

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Abstract:

We study the interaction between a group of agents who exert costly effort over time to complete a project, and a manager who chooses the objectives that must be met in order for her to sign off on it. The manager has limited commitment power so that she can commit to the requirements only when the project is sufficiently close to completion. This is common in projects that involve design or quality objectives, which are difficult to define far in advance. The main result is that the manager has incentives to extend the project as it progresses: she is time-inconsistent. This result has two implications. First, the manager will choose a larger project if she has less commitment power. Second, if the agents receive a fraction of the project's worth upon its completion, then the manager should delegate the decision rights over the project size to the agents unless she has sufficient commitment power. In this case, the agents will choose a smaller project than is optimal for the manager, but their preferences are time-consistent.

This is joint work with George Georgiadis and Steven Lippman.

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