Optimal Task Scheduling under Adverse Selection and Hidden Actions

Abstract

A Principal owns a project consisting of several tasks. Tasks differ, both in their innate success probabilities and their incremental benefits. Moreover, only specialists can perform these tasks. Subject to moral hazard and adverse selection, in what order should the Principal commission the tasks, and when should she terminate the project? What investments into changing tasks’ characteristics yield the highest marginal profit? These are typical issues that arise in sequencing R&D activities and other sequential production processes. We show that, despite informational constraints, a simple index—a task’s effective marginal contribution—determines the optimal schedule/mechanism. (JEL D82, L23, L24, L65, M11, O31)