Persuading the Regulator to Wait

Persuading the Regulator to Wait

By Dmitry Orlov, Andrzej Skrzypacz, Pavel Zryumov
February 13,2016Working Paper No. 3406

We study a Bayesian persuasion game in the context of real options. The Sender (firm) chooses signals to reveal to the Receiver (regulator) each period but has no long-term commitment power. The Receiver chooses when to exercise the option, affecting welfare of both parties. When the Sender favors late exercise relative to the Receiver but their disagreement is small, in the unique equilibrium information is disclosed discretely with a delay and the Receiver sometimes ex-post regrets waiting too long. When disagreement is large, the Sender, instead of acquiring information once and fully, pipets good information over time. These results shed light on the post-market surveillance practices of medical drugs and instruments by the FDA, and the role of pharmaceutical companies in keeping marginally beneficial drugs in the market. When the Sender favors early exercise, the lack of commitment not to persuade in the future leads to unraveling, in equilibrium all information is disclosed immediately. In sharp contrast to static environments, the ability to persuade might hurt the Sender.

Keywords
strategic communication, bayesian persuasion, dynamic games, real options