Optimal project termination with an informed agent

I study optimal incentive contracting when a temporary project is overseen by a firm with access to two channels of information about the project’s state a noisy public news process, and the reports of a manager possessing superior private information. The firm faces the decision problem of when to wrap up the project, as well as the agency problem of a manager with borrowing constraints and incentives for delayed termination. I develop techniques for solving the resulting novel mechanism design problem, which abstracts from time-zero asymmetric information but allows the agent to extract dynamic information rents. The optimal contract features a project deadline, which induces occasional inefficient early termination but no late termination; and a golden parachute, paid upon termination, which declines as the deadline approaches and is exhausted when the deadline is reached. Further, both the deadline and parachute exhibit sensitivity to news which varies with proximity to the deadline. Initially incentive pay is low-powered and the contract imposes a hard deadline; while late in the project incentive pay is high-powered and the deadline becomes porus.