Project Selection and Competitive Cheap Talk: an Experimental Study

Abstract: When agents with private information compete for resources from a principal and are biased towards their own favored projects (e.g., a CEO decides which division manager’s project to fund) an agency problem arises. However, possible future interaction can mitigate this problem even without reputational concerns, since an agent who induces acceptance of a low-valued project today consumes resources that crowd out even better opportunities that may arrive in the future. Using the theoretical model from Schmidbauer (Games & Economic Behavior, 2017), we devise experiments to address this organizational environment. Specifically, we study the incentives of competing agents to strategically communicate about their own favored project’s value (high or low) to an uninformed decision maker when new projects arrive over time. After observing all advice from agents, the decision maker decides which project to adopt, if any. If no project is adopted subjects enter the next period with new independently drawn projects and continue indefinitely until one project is adopted. We hypothesize that truth telling is easier to support the larger is the benefit from a high-quality project or the less likely it is to occur, but harder to support as agent competition grows. Our findings are broadly consistent with these hypotheses, though participants respond more easily in changes to incentives than to changes in probabilities.