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When mandatory disclosure hurts: Expert advice and conflicting interests

Listed author(s):
  • Li, Ming
  • Madarász, Kristóf

We study the quality of advice that an informed and biased expert gives to an uninformed decision maker. We compare two scenarios: mandatory disclosure of the bias and nondisclosure, where information about the bias can only be revealed through cheap-talk. We find that in many scenarios nondisclosure allows for higher welfare for both parties. Hiding the bias allows for more precise communication for the more biased type and, if different types are biased in different directions, may allow for the same for the less biased type. We identify contexts where equilibrium revelation allows but mandatory disclosure prevents meaningful communication.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022-0531(07)00117-2
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 139 (2008)
Issue (Month): 1 (March)
Pages: 47-74

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Handle: RePEc:eee:jetheo:v:139:y:2008:i:1:p:47-74
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Giuseppe Moscarini, 2007. "Competence Implies Credibility," American Economic Review, American Economic Association, vol. 97(1), pages 37-63, March.
  2. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
  3. Morgan, John & Stocken, Phillip C, 2003. " An Analysis of Stock Recommendations," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 183-203, Spring.
  4. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap Talk with Two Audiences," American Economic Review, American Economic Association, vol. 79(5), pages 1214-1223, December.
  5. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  6. Daylian M. Cain & George Loewenstein & Don A. Moore, 2005. "The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 1-25, 01.
  7. Cai, Hongbin & Wang, Joseph Tao-Yi, 2006. "Overcommunication in strategic information transmission games," Games and Economic Behavior, Elsevier, vol. 56(1), pages 7-36, July.
  8. repec:hoo:wpaper:e-89-7 is not listed on IDEAS
  9. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
  10. Blume, Andreas, et al, 1998. "Experimental Evidence on the Evolution of Meaning of Messages in Sender-Receiver Games," American Economic Review, American Economic Association, vol. 88(5), pages 1323-1340, December.
  11. Roland Benabou & Guy Laroque, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 921-958.
  12. Farrell Joseph, 1993. "Meaning and Credibility in Cheap-Talk Games," Games and Economic Behavior, Elsevier, vol. 5(4), pages 514-531, October.
  13. repec:cup:apsrev:v:95:y:2001:i:02:p:435-452_00 is not listed on IDEAS
  14. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
  15. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "Professional advice," Journal of Economic Theory, Elsevier, vol. 126(1), pages 120-142, January.
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