Contracting and Work Dynamics in Collaborative Projects

Unlike manufacturing processes, knowledge-intensive projects are often iterative, stochastic, and collaborative. In this paper, we study how contractual arrangements affect the work dynamics between a vendor and a client in finite-deadline collaborative projects. We consider a project that has been disambiguated and needs to be executed. We show that the client and the vendor should both exert high effort when the project is near completion, i.e., either when the project has reached a high state or when there is limited time left until the deadline. Otherwise, only one of them needs to exert high effort. When efforts are not contractible, i.e., with double moral hazard, the dynamics of collaboration depend on the contractual arrangement: Reward-sharing contracts yield suboptimal output and give rise to free-riding; fixed-fee completion bonuses make the vendor exert high effort only when the project has reached a high state; and with time-and-materials contracts, the vendor attempts to either shirk work or creep the project scope. Despite these shortcomings, our analysis reveals that simple contracts may perform well, but that they must be judiciously chosen based on the project characteristics