Design of Incentive Contracts, Basic Principles

Abstract

Some people claim that there is nothing new under the sun. Certainly incentive contracting is not new. The Navy Department boasts of Pepys using delivery incentives in the form of penalties and bonuses in ship contracts 300 years ago. In America, the War Department included a performance incentive in the Wright brothers' aircraft contract in 1907, providing for a 10% bonus for each mile per hour the aircraft would perform in excess of 40mph(18m/s).