Project Selection with Strategic Communication and Further Investigations

54 Pages Posted: 28 Nov 2011 Last revised: 18 Apr 2014

Heikki Rantakari

University of Rochester - Simon Business School

Date Written: April 18, 2014

Abstract

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.

Keywords: cheap talk, authority, delegation, information acquisition, decision-making

JEL Classification: D82, D83, L23, D23

Suggested Citation

Rantakari, Heikki, Project Selection with Strategic Communication and Further Investigations (April 18, 2014). Available at SSRN: https://ssrn.com/abstract=1962796 or http://dx.doi.org/10.2139/ssrn.1962796

Heikki Rantakari (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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