Hidden inefficiency: strategic inflation of project schedules

Lorko, Matej and Servátka, Maroš and Zhang, Le (2022): Hidden inefficiency: strategic inflation of project schedules.

Abstract

Establishing realistic project plans and completing the resulting business projects on schedule is crucial for organizations striving to effectively utilize their resources. However, incentivizing on-time project delivery may result in moral hazard, as people could respond to estimation accuracy incentives by strategically inflating duration estimates and subsequently prolonging project execution. While the project is delivered on time, the resources are underutilized. We conjecture that the possibility of moral hazard can be mitigated by introducing speed incentives in addition to the schedule accuracy incentives. We conduct a diagnostic test of the effect of accuracy and speed incentives on the process of project estimation and delivery. Our study presents direct empirical evidence that the incentive structure rewarding solely the estimation accuracy can result in hidden inefficiency due to inflated estimates and deliberately slower project execution. However, when speed incentives are implemented alongside estimation accuracy incentives, the estimates are significantly lower and the project is completed more quickly, without compromising the schedule accuracy or output quality. Aligning the objectives of a project owner with those of planners, by incentivizing the planners for both estimation accuracy and quick project completion, fosters more compressed but still accurate and reliable project schedules, and accelerated project delivery.

• Item Type: MPRA Paper
• Language: English
• Keywords: project management; project planning; time management; duration estimation; moral hazard
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O21 - Planning Models ; Planning Policy; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O22 - Project Analysis

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