Biased Experts, Costly Lies, and Binary Decisions

Institute for Empirical Research in Economics, University of Zurich, Working Paper No. 496

37 Pages Posted: 14 Jul 2010

See all articles by Roland Hodler

Roland Hodler

affiliation not provided to SSRN

Simon Loertscher

University of Melbourne - Department of Economics

Dominic Rohner

University of Zurich

Date Written: July 2, 2010

Abstract

Decision makers lacking crucial specialist know-how often consult with better informed but biased experts. In our model the decision maker’s choice problem is binary and her preferred option depends on the state of the world unknown to her. The expert observes the state and sends a report to the decision maker. His bias is such that he prefers the same decision for all states. Lying about the state leads to a cost that increases in the size of the lie. As a function of the size of the expert’s bias and the decision maker’s prior about the underlying state, three kinds of equilibrium behavior occur. In each case equilibrium consists of separating and pooling segments, and the decision maker takes the expert’s preferred decision for some states for which she would not take this decision had she observed the state herself. The model has a variety of applications and extends to situations in which the decision maker may be naive and take the report by its face value, and to situations with multiple experts and uncertainty about the size of the expert’s bias.

Keywords: Experts, Policy Advice, Information Distortion, Costly Signalling

JEL Classification: C72, D72, D82

Suggested Citation

Hodler, Roland and Loertscher, Simon and Rohner, Dominic, Biased Experts, Costly Lies, and Binary Decisions (July 2, 2010). Institute for Empirical Research in Economics, University of Zurich, Working Paper No. 496, Available at SSRN: https://ssrn.com/abstract=1639351 or http://dx.doi.org/10.2139/ssrn.1639351

Roland Hodler (Contact Author)

affiliation not provided to SSRN ( email )

Simon Loertscher

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Dominic Rohner

University of Zurich ( email )

Muehlebachstrasse 86
Zurich, 8008
Switzerland

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