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Costly transparency

  • Fox, Justin
  • Van Weelden, Richard
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    We consider whether a career-minded expert would make better decisions if the principal could observe the consequences of the expert's action. The previous literature has found that this “transparency of consequence” can only improve the efficacy of the expert's decision making. We show, however, that this conclusion is very sensitive to the specified cost structure: if learning the consequences of the expert's action makes the expert more likely to choose the action most likely to correspond to the true state of the world, when costs are asymmetric, this can be associated with a decrease in the principal's expected welfare. In addition, we show that, when the prior on the state of the world is sufficiently strong, if the principal benefits from learning the consequences of the expert's action, her utility is higher if she observes only the consequences and not the action taken. For such priors, the optimal transparency regime will involve either the principal observing only the expert's action or only the consequences of the expert's action: it will never be optimal to observe both. We illustrate these results with examples from finance and public policymaking.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0047272711001484
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    Article provided by Elsevier in its journal Journal of Public Economics.

    Volume (Year): 96 (2012)
    Issue (Month): 1 ()
    Pages: 142-150

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    Handle: RePEc:eee:pubeco:v:96:y:2012:i:1:p:142-150
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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    1. Andrea Prat, 2004. "The wrong kind of transparency," LSE Research Online Documents on Economics 24712, London School of Economics and Political Science, LSE Library.
    2. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    8. Adam Brandenburger & Ben Polak, 1996. "When Managers Cover Their Posteriors: Making the Decisions the Market Wants to See," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 523-541, Autumn.
    9. Gilat Levy, 2004. "Anti-herding and strategic consultation," LSE Research Online Documents on Economics 541, London School of Economics and Political Science, LSE Library.
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