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When Second Opinions Hurt: A Model of Expert Advice under Career Conce rns

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  • Liu, Yaozhou Franklin
  • Sanyal, Amal

Abstract

We augment the standard career concerns model by introducing (i) an action that blocks the information about the true state of the world and (ii) the possibility that the principal might reverse her initial action after receiving an interim news. In this model, the principal's decisions as well as the expert's message endogenously determine the observability of the states and consequently, the assessment of the expert's ability by the principal. We show that having access to better interim news could reduce the welfare of the principal due to its strategic eff ect on the expert's recommendation. We also discuss the implication of the results for possible delegation of decision making to another person with di fferent preference parameters.

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File URL: http://hdl.handle.net/2123/7115
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Bibliographic Info

Paper provided by University of Sydney, School of Economics in its series Working Papers with number 2010-08.

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Date of creation: Dec 2010
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Handle: RePEc:syd:wpaper:2123/7115

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Web page: http://sydney.edu.au/arts/economics
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Keywords: Career Concerns; Reputational Cheaptalk; Signaling Game;

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  1. Effinger, Matthias R. & Polborn, Mattias K., 2001. "Herding and anti-herding: A model of reputational differentiation," European Economic Review, Elsevier, vol. 45(3), pages 385-403, March.
  2. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
  3. Marco Battaglini, 2002. "Multiple Referrals and Multidimensional Cheap Talk," Econometrica, Econometric Society, vol. 70(4), pages 1379-1401, July.
  4. Prat, Andrea, 2003. "The Wrong Kind of Transparency," CEPR Discussion Papers 3859, C.E.P.R. Discussion Papers.
  5. Holmstrom, Bengt & Ricart i Costa, Joan, 1986. "Managerial Incentives and Capital Management," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 835-60, November.
  6. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
  7. Levy, Gilat, 2004. "Anti-herding and strategic consultation," Open Access publications from London School of Economics and Political Science http://eprints.lse.ac.uk/, London School of Economics and Political Science.
  8. Ottaviani, Marco & Sorensen, Peter, 2001. "Information aggregation in debate: who should speak first?," Journal of Public Economics, Elsevier, vol. 81(3), pages 393-421, September.
  9. Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 169-82, January.
  10. Suurmond, Guido & Swank, Otto H. & Visser, Bauke, 2004. "On the bad reputation of reputational concerns," Journal of Public Economics, Elsevier, vol. 88(12), pages 2817-2838, December.
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