Limited Capacity in Project Selection: Competition Through Evidence Production
40 Pages Posted: 8 Apr 2014
Date Written: March 30, 2014
A principal must decide whether to accept or reject each of two proposed projects. Each project is backed by an agent, who generates evidence about the quality of his proposal. Although agents control the informativeness of their evidence, they cannot distort or hide evidence from the principal once it is generated. Consistent with other models of 'Bayesian persuasion,' if the principal can implement both projects, the agents' ability to produce information does not benefit the principal. When the principal can accept only one proposal, however, the capacity constraint forces agents to compete. In response, the agents generate evidence that is more Blackwell informative than in the game without capacity constraints. We characterize the equilibrium under limited capacity, determining the effect of limited capacity on outcomes. Unless the prior strongly favors accepting both proposals, the principal is better off when capacity is limited.
Keywords: strategic search, evidence production, persuasion, lobbying, project selection, Bayesian persuasion, all-pay auction
JEL Classification: D72, D78, D83, L15
Suggested Citation: Suggested Citation