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Professional advice

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  • Ottaviani, Marco
  • Sorensen, Peter Norman

Abstract

Professional experts offer advice with the objective of appearing well informed. Their ability is evaluated on the basis of the advice given and the realized state of the world. We model this situation as a reputational cheap-talk game with continuous signal, state, and ability type spaces. Despite allowing a message space as rich as the signal space, at best two messages are sent in the most informative equilibrium. The expert can credibly transmit only the direction but not the intensity of the information possessed. Equilibrium forecasts are then systematically less precise than under truthtelling, and learning on the expert's ability is slow.
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Suggested Citation

  • Ottaviani, Marco & Sorensen, Peter Norman, 2006. "Professional advice," Journal of Economic Theory, Elsevier, vol. 126(1), pages 120-142, January.
    • Handle: RePEc:eee:jetheo:v:126:y:2006:i:1:p:120-142
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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