Setbacks, Shutdowns, and Overruns

Felix Zhiyu Feng, Curtis R. Taylor, Mark M. Westerfield, and Feifan Zhang
Econometrica 2024, 92(3): 815-847

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Summary

We investigate optimal project management when problems are discovered in the natural course of development instead of as the result of shirking. The sponsor induces work via a soft deadline and a linear bonus for early delivery: a time-budget contract.

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.

Cite as

Feng, Felix Zhiyu, Curtis R. Taylor, Mark M. Westerfield, and Feifan Zhang. 2024. “Setbacks, Shutdowns, and Overruns.” Econometrica 92(3): 815–847. https://doi.org/10.3982/ECTA21548

BibTeX

@article{FengTaylorWesterfieldZhang2024,
  author  = {Feng, Felix Zhiyu and Taylor, Curtis R. and Westerfield, Mark M. and Zhang, Feifan},
  title   = {Setbacks, Shutdowns, and Overruns},
  journal = {Econometrica},
  year    = {2024},
  volume  = {92},
  number  = {3},
  pages   = {815--847},
  doi     = {10.3982/ECTA21548},
  url     = {https://doi.org/10.3982/ECTA21548}
}

The PDF posted here is the authors’ manuscript (February 2024 draft). The version of record is available from the journal at the DOI above. Updated October 5, 2026.