The Dynamics of Verification when Searching for Quality

An agent samples projects over time, observing quality for each, while a principal can select at most one. The principal values quality, whereas the agent only wants a project chosen. Transfers are unavailable, but the principal can verify quality by paying a cost. We fully characterize the dynamics of verification by determining optimal mechanisms for this problem. With a low verification cost and a long horizon, the optimal mechanism involves a deterministic selection rule that initially discriminates on quality but chooses a project irrespective of it at a deadline. Verification occurs with an intermediate probability before the deadline, declining over time. We show how these conclusions change if the verification cost is high or if the horizon is short. Our analysis provides guidelines on how dynamics interact with the benefits of verification.

(joint with Zihao Li)

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