Project Networks and Reallocation Externalities

A project involves several participants—including clients, contractors, and subcontractors—that work concurrently on multiple projects and allocate resources among them. This interdependency creates a network of otherwise-unrelated projects. We map the network of U.S. government projects involving over 150,000 participants. We show that a seemingly localized disruption, affecting only one project site, eventually causes delays across unrelated projects. This is because participants opportunistically reallocate resources into disrupted projects, at the expense of other projects, triggering a domino effect of further reallocations in the network. Thus, the costs of on-site disruptions end up being shared by multiple participants in the network, rather than being fully absorbed by the affected project. Performance-based incentives, which reward contractors for timeliness, exacerbate these externalities by encouraging self-interested resource reallocation. This paper was accepted by Karan Girotra, operations management. Funding: This work was supported by the Natural Sciences and Engineering Research Council of Canada (NSERC) [Grant RGPIN-2017-04523]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01574 .