The Perverse Incentive of Knowing the Truth
AbstractWe show that the observation by a principal of the effectiveness of an expert‘s action could induce the expert to lie, damaging the principal. A career-minded expert receives a private-informative signal about the real state of the world, and then he takes an action that can match or not the real state. If a principal observes the consequences of this expert’s action, i.e., if the action matches or not the real state, this expert could disregard his valuable information damaging the principal: the expert plays the opposite action to that recommended by his signal and consequently decreases the probability of matching the real state. However, this expert could play the "recommended" action with positive probability if consequences are not observed. The previous literature has found that "transparency of consequence" can only improves the incentives of the expert to reveal his valuable information. The paradoxical behavior we have found can appear when the expert needs to signal with one action two different kinds of information, and there is a particular "trade-off" in the way of signaling; this "trade-off" can be affected in an unexpected way by the observation of the expert’s action consequences. In this paper, we present a simple model to capture this idea, and characterize the range of the parameters where that occurs.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 43825.
Date of creation: 15 Jan 2013
Date of revision:
Transparency; Principal-Agent; Reputation;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-26 (All new papers)
- NEP-CDM-2013-01-26 (Collective Decision-Making)
- NEP-CTA-2013-01-26 (Contract Theory & Applications)
- NEP-HPE-2013-01-26 (History & Philosophy of Economics)
- NEP-MIC-2013-01-26 (Microeconomics)
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