When a principal relies on an agent, a conflict of interest can encourage the agent to provide biased advice. Conventional wisdom suggests that such behavior can be reduced through disclosure requirements. However, disclosure has been shown to exacerbate self-serving bias and can actually lead to greater harm for the principal in one-shot interactions. But in many naturally occurring settings, agents form reputations, a mechanism that could diminish the incentive to provide biased advice. We test for bias in the advice agents provide when faced with reputation concerns, and examine the impact of disclosure in such an environment. In controlled laboratory experiments, we find little evidence of self-serving bias in the absence of disclosure when (3) agents form reputations and (4) principals use that information in selecting agents. However, we find the introduction of disclosure leads to self-serving biased advice that is difficult for principals to detect. When the conflict of interest is endogenous, we find that agents overwhelmingly put themselves in the position of having a conflict of interest, but principals neither avoid conflicted agents nor differentially discount the advice such agents provide.
Deck, C. & Tracy, J. D. (2020). Keeping a clean reputation: More evidence on the perverse effects of disclosure. ESI Working Paper 20-21. https://digitalcommons.chapman.edu/esi_working_papers/316/