Project Selection with Strategic Communication and Further Investigations
University of Southern California - Marshall School of Business - Finance and Business Economics Department
April 18, 2014
An uninformed principal elicits soft information from privately informed agents regarding the quality of their projects, and may then further investigate their proposals. The principal's ability to acquire further information crowds out soft information, and may even worsen organizational performance. The impact of further investigations on the quality of soft information is non-monotone, with the crowding out effect strongest for intermediate costs of investigating. The principal can attenuate this tension by both (i) favoring one of the agents in the decision-making stage and (ii) allowing the agents to meet behind closed doors before communicating their recommendations to her. Thus, seemingly negative organizational practices such as opacity and favoritism emerge as second-best responses to managing the principal's commitment problem in the extent of her involvement.
Number of Pages in PDF File: 54
Keywords: cheap talk, authority, delegation, information acquisition, decision-making
JEL Classification: D82, D83, L23, D23
Date posted: November 28, 2011 ; Last revised: April 18, 2014