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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 her 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 behavior 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 the principal bene.ts from committing not to observe the agent's action. The paper also shows the existence of strategic complementarities between information on action and information on consequence. The results on the distinction between action and consequence are then used to interpret existing disclosure policies in delegated portfolio management. In particular, they are consistent with hitherto puzzling evidence that mutual funds systematically overperform pension funds.

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File URL: http://eprints.lse.ac.uk/24712/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24712.

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Length: 33 pages
Date of creation: 26 May 2004
Date of revision:
Handle: RePEc:ehl:lserod:24712
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

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