Getting it done: dynamic incentives to complete a project

A principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. We characterise the contracts that the principal sets, with and without commitment. With full commitment, the contract involves the agent’s value and wage declining over time, in order to give the agent incentives to exert effort. The best sequentially rational equilibrium for the principal also involves the agent’s wage declining over time, while the worst sequentially rational equilibrium for the principal has a constant wage (and is in fact the unique stationary equilibrium). The best (weakly) renegotiation-proof equilibrium for the principal is achieved by a constant wage that maximizes the principals payoff, conditional on wages being constant. We compare these solutions to the efficient outcome.