Incentives and Gaming in Collaborative Projects Under Risk-Sharing Partnerships

Abstract

Problem definition: This article explores the incentive issues and gaming behaviors of firms under risk-sharing partnerships in a project management setting motivated by real-life examples. Academic/practical relevance: Collaboration prevails in projects within diverse industries. The risk-sharing partnership, in which each partner pays for its own cost and shares the outcome (either reward or loss) on project completion, is one of the most popular ways to manage collaborations in practice. However, the risk-sharing partnership may lead to project failure in the forms of excessive delays and cost overruns, but the driving forces (for example, incentives) and mechanisms (for example, gaming behaviors) in project management settings are not yet fully understood. Methodology: Relative to the one-firm-does-all strategy, we studied how risk-sharing partnerships may affect firms’ incentives in project execution and thus, project metrics (duration and cost) for various project networks (serial versus parallel), risk levels (deterministic versus stochastic duration), and information status (symmetry versus asymmetry). Results: We found that risk-sharing partnerships may encourage deliberate delays and cost overruns through various mechanisms, such as the Prisoner’s Dilemma, the Supplier’s Dilemma, and the Coauthor’s Dilemma. Counterintuitively, information asymmetry may outperform information symmetry on project metrics for both deterministic and stochastic duration, contingent on the network structure, cost parameters, and partners’ beliefs. Managerial implications: By connecting theory to practice, we provide insights into the incentive issues of some real-life projects and justifications for several mitigation strategies to avoid such gaming behaviors in practice.