Project Selection with Strategic Communication and Further Investigations

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