Persuading the Principal to Wait

Abstract

A principal decides when to exercise a real option. A biased agent influences this decision by strategically disclosing information. Committing to disclose all information with a delay is the optimal way to persuade the principal to wait. Without dynamic commitment, this promise is credible only if the agent’s bias is small; otherwise, he pipets information, probabilistically delaying the principal’s action. When the agent is biased toward early exercise, his lack of commitment to remain quiet leads to immediate disclosure, hurting him. Our model applies to pharmaceutical companies conducting clinical trials to influence the Food and Drug Administration or equipment manufacturers testing their products.