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When second opinions hurt: A model of expert advice under career concerns

  • Liu, Yaozhou Franklin
  • Sanyal, Amal

We develop a reputational cheap talk model where the principal can cancel an action initially started on the advice of an expert if she gets some unfavorable interim news. But if the status quo is reinstated, the principal is unable to verify the true state of the world. In the model, experts want to appear smart and we find that the possibility of canceling the action encourages less well informed experts to recommend it more often. We then show that gaining access to interim news as well as improving the quality of an existing one can both reduce the principal's welfare. The model implies that delegating the decision rights to another person with different preferences can be used as a commitment device by the principal and might improve her welfare.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 84 (2012)
Issue (Month): 1 ()
Pages: 1-16

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Handle: RePEc:eee:jeborg:v:84:y:2012:i:1:p:1-16
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