Reputation and Information Aggregation
48 Pages Posted: 6 Jun 2016 Last revised: 29 Aug 2017
Date Written: August 28, 2017
We analyze how reputation concerns for expertise of a partially informed decision maker affect her ability to extract information from reputation-concerned advisors. Very high reputation concerns of the decision maker destroy her incentives to seek advice. Yet, when such concerns are not high enough, the decision maker is tempted to ask for advice regardless of her private information, which can destroy advisors' truth-telling incentives. The optimal strength of the decision maker's reputation concerns maximizes advice-asking without undermining advisors' incentives. Thus, differently from most of the literature, we show how reputation concerns can improve efficiency through better aggregation of information. Prior uncertainty about the state of nature calls for a more reputation-concerned decision maker, unless the uncertainty becomes too high, in which case the reputation concerns become (almost) irrelevant. Finally, higher prior competence of the decision maker and/or advisors may worsen information aggregation through its impact on the advice-seeking incentives, if the reputation concerns are not properly adjusted.
Keywords: Reputation Concerns, Information Aggregation, Advice
JEL Classification: D82, D83
Suggested Citation: Suggested Citation