Project Management under Risk-Sharing Contracts

Abstract

We study the coordination problem in a setting with multiple contractors working on a project. Specifically, we analyze the risk-sharing contract in which the contractors are paid at the end of the project, after all the tasks have been completed. Although intuitively the contractors should try to complete their tasks early, because under the risk-sharing contract the risk of delay is shared between them and the OEM, we show that the contractors may fail to coordinate their efforts. For a project with parallel tasks, there exist multiple Pareto-ranked equilibria, where all contractors exert the same efforts, and the worst project delay is observed when the contractors play the secure equilibrium. To mitigate this coordination failure, we propose an information feedback policy, and show that the contractors’ efforts in the secure equilibrium increase in the information feedback frequency. Therefore, the OEM may induce the contractors to increase their effort by providing information feedback with frequency that increases linearly in the number of contractors. To test our theoretical findings, we conducted a behavioral experiment that varied the availability of information feedback and the number of contractors. Our experiment confirms that absent feedback, coordination failure occurs, and information feedback is effective in improving the project progress.