Strategically revealing capabilities in General Lotto games

Abstract

Can revealing one's competitive capabilities to an opponent offer strategic benefits? In this paper, we address this question in the context of General Lotto games, a class of two-player competitive resource allocation models. We consider an asymmetric information setting where the opponent is uncertain about the resource budget of the other player, and holds a prior belief on its value. We assume the other player, called the signaler, is able to send a noisy signal about its budget to the opponent. With its updated belief, the opponent then must decide to invest in costly resources that it will deploy against the signaler's resource budget in a General Lotto game. We derive the subgame perfect equilibrium to this extensive-form game. In particular, we identify necessary and sufficient conditions for which a signaling policy improves the signaler's resulting performance in comparison to the scenario where it does not send any signal. Moreover, we provide the optimal signaling policy when these conditions are met. Notably we find that for some scenarios, the signaler can effectively double its performance.