Discovery through Trial Balloons

TL;DR

This paper analyzes how a principal optimally discovers project values through trial balloons under uncertainty, highlighting the strategic use of disfavored projects with high variance to maximize approval probabilities.

Contribution

It characterizes optimal discovery strategies for various principal preferences, emphasizing the role of high-variance, disfavored projects in decision-making.

Findings

Discovering disfavored projects can be optimal due to their higher variance.

Optimal discovery balances project disfavorability and variance levels.

Trial balloons can rationalize controversial policies in legislative and organizational contexts.

Abstract

A principal and an agent face symmetric uncertainty about the value of two correlated projects for the agent. The principal chooses which project values to publicly discover and makes a proposal to the agent, who accepts if and only if the expected sum of values is positive. We characterize optimal discovery for various principal preferences: maximizing the probability of the grand bundle, of having at least one project approved, and of a weighted combination of projects. Our results highlight the usefulness of trial balloons: projects which are ex-ante disfavored but have higher variance than a more favored alternative. Discovering disfavored projects may be optimal even when their variance is lower than that of the alternative, so long as their disfavorability is neither too large nor too small. These conclusions rationalize the inclusion of controversial policies in omnibus bills and the presence of moonshot projects in organizations.