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Incentives and Alignment in Collaborative Projects

Collaboration and partnerships prevail in large and complex projects but may incur externalities that encourage deliberate delays and cost overruns. This paper characterizes the externalities under the popular loss-sharing partnership and designs alignment strategies in a project operations context. By integrating the economic theory of teams with project operations specifics on time-cost trade-off, we discover various forms of mis-aligned incentives in project execution, such as, the Prisoners’ Dilemma, and the new Supplier’s Dilemma and Coauthors’ Dilemma. These dilemmas reveal how individual firms can be motivated to execute their tasks against the best interest of the project and how collaboration may impact project duration and cost adversely. To align the incentives in collaborative projects, we derive a payment distribution scheme to separate the consequences of one’s action from the aggregated project outcome and present a new “fair-sharing” partnership to ensure that each firm is fully responsible for its actions.