Project selection with partially verifiable information

TL;DR

This paper analyzes a principal-agent project selection problem with private, partially verifiable information, characterizing optimal mechanisms and revealing a simple cutoff structure for two projects.

Contribution

It introduces a characterization of implementable mechanisms under partial verifiability and demonstrates the optimality of cutoff mechanisms in two-project scenarios.

Findings

Optimal mechanisms are characterized under partial verifiability.

In two-project cases, the optimal mechanism is a simple cutoff rule.

Evidence supports the ally-principle of delegating more authority to aligned agents.

Abstract

We consider a principal agent project selection problem with asymmetric information. There are $N$ projects and the principal must select exactly one of them. Each project provides some profit to the principal and some payoff to the agent and these profits and payoffs are the agent's private information. We consider the principal's problem of finding an optimal mechanism for two different objectives: maximizing expected profit and maximizing the probability of choosing the most profitable project. Importantly, we assume partial verifiability so that the agent cannot report a project to be more profitable to the principal than it actually is. Under this no-overselling constraint, we characterize the set of implementable mechanisms. Using this characterization, we find that in the case of two projects, the optimal mechanism under both objectives takes the form of a simple cutoff mechanism. The simple structure of the optimal mechanism also allows us to find evidence in support of the well-known ally-principle which says that principal delegates more authority to an agent who shares their preferences.