A Theory of Advice Based on Information Search Incentives
AbstractThis paper investigates whether recourse to a consultant always enhances decision making. Advice given by a consultant changes the manager’s belief about his own decision-making ability. This change in belief alters the manager’s incentives to make a decision. Taking into account this effect, we characterize the contracts that the firm must offer to the manager when a consultant with a given expertise is hired. Surprisingly, we find that the benefit curve of the firm may decrease as the consultant expertise increases, even if there is no consulting fee. Moreover, we show that the value of advice depends on the “good fit” between the informativeness of the consultant and the manager’s incentives to reach the right decision.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10357.
Date of creation: 29 Apr 2003
Date of revision:
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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More information through EDIRC
advice; value of information; information search; incentives;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-05-08 (All new papers)
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