Optimal Project Management
We study the optimal incentives provision in long-term projects. The project is successful if and only if the progress level of the project reaches the exogenously specified threshold. Progress of the project is stochastic and proportional to the funds invested in it. Required funding is provided by the principal and the principal requires the agent’s expertise to run the project. The agent can privately divert funds for personal use. We characterize the optimal contract. Optimal contract consists of two regions (efficient and inefficient region) and a path-dependent bonus. If the agent’s continuation utility is high enough principle can implement the first-best policy.