Document Type

Article

Publication Date

6-9-2020

Abstract

Conflicts of interest arise in many principal agent settings. Conventional wisdom suggests that the bias such incentives generate can be reduced with disclosure requirements, but at least some studies have found disclosure can exacerbate the level of bias. We consider an alternative force to reduce bias - market competition between agents and consider the effect of disclosure in the presence of market pressure. In each round of our experimental task, principals face a choice between two options and select among two agents from whom to seek advice. We test three treatments: one, in which the principals rate agents after receiving advice and other principals can condition which agent they select on those ratings; a second, which is similar to the first treatment but where the conflict of interest is disclosed; and a third in which market pressure is removed. Our results demonstrate that without disclosure there is no bias when there is competitive pressure while introducing disclosure generates bias. As expected, removing competitive pressure also leads to biased behavior.

Comments

ESI Working Paper 20-21

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