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A Theory of Advice Based on Information Search Incentives

  • Marcoul, Philippe

This paper investigates whether recourse to a consultant always enhances decision making. Advice given by a consultant changes the manager’s belief about his own decision-making ability. This change in belief alters the manager’s incentives to make a decision. Taking into account this effect, we characterize the contracts that the firm must offer to the manager when a consultant with a given expertise is hired. Surprisingly, we find that the benefit curve of the firm may decrease as the consultant expertise increases, even if there is no consulting fee. Moreover, we show that the value of advice depends on the “good fit” between the informativeness of the consultant and the manager’s incentives to reach the right decision.

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p3822-2003-04-29.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10357.

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Date of creation: 29 Apr 2003
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Handle: RePEc:isu:genres:10357
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  1. James Malcomson, 2004. "Principal and Expert Agent," Economics Series Working Papers 193, University of Oxford, Department of Economics.
  2. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  3. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  4. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Osband, Kent, 1989. "Optimal Forecasting Incentives," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1091-1112, October.
  6. Austen-Smith David, 1993. "Interested Experts and Policy Advice: Multiple Referrals under Open Rule," Games and Economic Behavior, Elsevier, vol. 5(1), pages 3-43, January.
  7. Bengt Holmstrom & I. Ricard & Joan Costa, 1984. "Managerial Incentives and Capital Management," Cowles Foundation Discussion Papers 729, Cowles Foundation for Research in Economics, Yale University.
  8. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May.
  9. Steven D. Levitt & Christopher M. Snyder, 1997. "Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 641-661, Winter.
  10. Marco Ottaviani & Peter Sorensen, 1999. "Professional Advice," Game Theory and Information 9906003, EconWPA.
  11. Jan Zabojnik, 2002. "Centralized and Decentralized Decision Making in Organizations," Journal of Labor Economics, University of Chicago Press, vol. 20(1), pages 1-22, January.
  12. Nicola Persico, 2004. "Committee Design with Endogenous Information," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 165-191, 01.
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