Investment and information acquisition

Abstract

We study the interaction between productive investment and persuasion activities in a principal-agent setting with strategic disclosure. In an attempt to persuade the principal, the agent diverts substantial resources from productive activities to information acquisition for persuasion, even though productive activities are more efficient and raise the chances of success in persuasion. We show that a higher cost of an investment project results in a lower productive investment. We further demonstrate how a commitment by the agent to disclose all acquired information, or a commitment by the principal to a decision rule, curtail the inefficiency and stimulate productive investment.