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The Wrong Kind of Transparency

  • Andrea Prat

In a model of career concerns for experts, when is a principal hurt from observing more information about their agent? This Paper introduces a distinction between information on the consequence of the agent's action and information directly on the agent's action. When the latter kind of information is available, the agent faces an incentive to disregard useful private signals and act according to how an able agent is expected to act a priori. This conformist behaviour hurts the principal in two ways: the decision made by the agent is less likely to be the right one (discipline) and ex post it is more difficult to evaluate the agent's ability (sorting). The Paper identifies a necessary and sufficient condition on the agent signal structure under which transparency on action is detrimental to the principal. The Paper also shows the existence of complementarities between transparency on action and transparency on consequence. The results on the distinction between transparency on action and transparency on consequence are then used to interpret existing disclosure policies in politics, corporate governance, and delegated portfolio management.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 3 (June)
Pages: 862-877

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:3:p:862-877
Note: DOI: 10.1257/0002828054201297
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