Managing Planning and Production Moral Hazard

We characterize the optimal policy to induce a manager to assess the merits of a potential investment project, decide whether to implement the project, and enhance the performance of the project if it is implemented. We find that the initial planning moral hazard problem often is more constraining than the subsequent production moral hazard problem. To mitigate the planning moral hazard problem, under-investment is optimally induced when the project is initially thought to be profitable, whereas over-investment is induced when the project is initially thought to be unprofitable.