Palit, N. and Brint, A. (2020) The effect of risk aversion on the optimal project resource rate. European Journal of Operational Research, 287 (3). pp. 1092-1104. ISSN 0377-2217
Abstract
Under resourcing a project increases the probability of a time overrun. Consequently, project contracts should be designed to encourage an appropriate allocation of resources to the project. A common way to encourage timely completion is to use contracts with time penalties and incentives linked to the completion time. If there are a number of competing contractors, then the project manager can employ a take it or leave it approach in designing the contract. However, where there are very few possible contractors, then a bargaining approach is more appropriate for the contract's construction. Therefore, this paper investigates how close the resource rate stemming from the Nash bargaining contract is to the optimal rate. Risk neutral and risk averse project managers and contractors are considered. It is found that when the contractor is risk neutral, the chosen resource rate is independent of the project completion time distribution no matter whether the project manager is risk neutral or risk averse, and it coincides with the optimal, i.e. centrally coordinated, rate. When the contractor is risk averse, the resource rate is dependent on the project completion time distribution. However, the results indicate that if the contractor is less risk averse than the project manager, then the resource rate is approximately the optimal one. Hence a time based contract designed using Nash bargaining is particularly suitable when the number of possible contractors is small and they are large enough with regard to the project size to be less risk averse than the project manager.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2020 Elsevier B.V. This is an author produced version of a paper subsequently published in European Journal of Operational Research. Uploaded in accordance with the publisher's self-archiving policy. Article available under the terms of the CC-BY-NC-ND licence (https://creativecommons.org/licenses/by-nc-nd/4.0/). |
Keywords: | Game theory; project completion; resource rate; contract design |
Dates: |
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Institution: | The University of Sheffield |
Academic Units: | The University of Sheffield > Faculty of Social Sciences (Sheffield) > Management School (Sheffield) |
Depositing User: | Symplectic Sheffield |
Date Deposited: | 23 Jul 2020 08:43 |
Last Modified: | 24 May 2022 12:00 |
Status: | Published |
Publisher: | Elsevier BV |
Refereed: | Yes |
Identification Number: | 10.1016/j.ejor.2020.05.003 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:163678 |