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Vague Lies: How to Advise Consumers When They Complain

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  • Drugov, Mikhail
  • Troya Martinez, Marta

Abstract

This paper analyzes the incentives of a seller to provide (un)biased and (im)precise advice about a complex product such as insurance, banking and telecommunication services. Misleading the buyers by biasing the advice upwards increases the revenues but also the expected fine imposed by the authority. Making the advice less precise does not affect the revenues in equilibrium but interferes with the authority's inference and affects the expected fine in a non-monotonic way. In particular, making the advice less precise makes it harder to convict the seller but increases the expected fine when the seller is found guilty. We find that, in the equilibrium, biasing the advice and making it noisier are complements; in particular, a higher buyers' heterogeneity, a stricter standard of proof employed by the authority and a larger share of credulous consumers make the advice more biased and less precise.

Suggested Citation

  • Drugov, Mikhail & Troya Martinez, Marta, 2012. "Vague Lies: How to Advise Consumers When They Complain," CEPR Discussion Papers 9201, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9201
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    References listed on IDEAS

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    Cited by:

    1. Mikhail Drugov & Marta Troya‐Martinez, 2019. "Vague lies and lax standards of proof: On the law and economics of advice," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(2), pages 298-315, April.
    2. Troya-Martinez, Marta, 2016. "Vagueness and information-sharing," Games and Economic Behavior, Elsevier, vol. 100(C), pages 301-320.

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    More about this item

    Keywords

    Advice; Persuasion; Legal procedure; Consumer protection;
    All these keywords.

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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