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When mandatory disclosure hurts: expert advice and conflicting interests

By Ming Li and Kristóf Madarász

Abstract

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

Topics: HB Economic Theory
Publisher: Elsevier
Year: 2008
DOI identifier: 10.1016/j.jet.2007.07.009
OAI identifier: oai:eprints.lse.ac.uk:37048
Provided by: LSE Research Online
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