Persuading the Principal to Wait

35 Pages Posted: 20 Apr 2016 Last revised: 27 Aug 2018

See all articles by Dmitry Orlov

Dmitry Orlov

University of Rochester - Simon Business School

Andrzej Skrzypacz

Stanford University - Stanford Graduate School of Business

Pavel Zryumov

University of Rochester - Simon Business School

Date Written: August 23, 2018

Abstract

A principal decides when to exercise a real option. A biased agent influences this decision by strategically disclosing relevant information. To persuade the principal to wait it is optimal to commit to delayed disclosure of all information. Without long-term commitment, this promise is credible only if the agent’s bias towards delayed exercise is small; otherwise, the agent pipets information, probabilistically delaying the principal’s action. When the agent is biased towards early exercise, his lack of commitment to remain quiet leads to immediate disclosure, hurting the agent. Our model applies to pharmaceutical companies conducting post-market clinical trials to influence the FDA or equipment manufacturers testing their products to attract customers.

Keywords: strategic communication, bayesian persuasion, dynamic games, real options

JEL Classification: C73, D83

Suggested Citation

Orlov, Dmitry and Skrzypacz, Andrzej and Zryumov, Pavel, Persuading the Principal to Wait (August 23, 2018). Stanford University Graduate School of Business Research Paper No. 16-20. Available at SSRN: https://ssrn.com/abstract=2767234 or http://dx.doi.org/10.2139/ssrn.2767234

Dmitry Orlov

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://mentalexperiments.wordpress.com

Andrzej Skrzypacz

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-0987 (Phone)
650-725-9932 (Fax)

Pavel Zryumov (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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