An offer you can refuse: the effects of transparency with endogenous conflict of interest

James Tremewan, Melis Kartal

This paper studies the effects of transparency on information transmission and
decision-making theoretically and experimentally. We develop a model in which a decision maker seeks the advice of a better-informed adviser. Before giving advice, the adviser may choose to accept a side payment from a third party, where accepting this payment binds the advisor to give a particular recommendation, which may or may not be dishonest. Without transparency, the decision maker learns only the recommendation of the adviser. With transparency, the decision maker learns in addition the decision of the adviser with respect to the side payment. Prior research has shown that transparency is either ineffective or harmful to decisionmakers- because conflicted
advisers become more dishonest in their advice. The novelty of our model is that the conflict of interest is endogeneous as the adviser can choose to decline the third-party payment. Our theoretical results predict that transparency is never harmful and may help decision makers. Our experimental results show that transparency improves the accuracy of decision making. However, we also observe that (i) while transparency clearly improves decision making when it is mandatory, the evidence in favor of a voluntary form of transparency is much weaker, and that (ii) the positive effects of transparency decline over time.

Department of Economics
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Publication date
Austrian Fields of Science 2012
502047 Economic theory, 502045 Behavioural economics
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