On Young Turks and Yes Men: Optimal Contracting for Advice

40 Pages Posted: 29 Aug 2018 Last revised: 6 Sep 2019

See all articles by Samuel Häfner

Samuel Häfner

University of St. Gallen

Curtis R. Taylor

Duke University - Department of Economics

Date Written: September 5, 2019

Abstract

The incentives for an advisor first to diligently perform research and second to accurately report her results are investigated in a model of optimal contracting. To motivate the advisor to collect and analyze the relevant data, her compensation must include a contingent component that depends on whether her reported findings are ultimately consistent with the outcome of the sponsor's project. This endogenously creates incentives for the advisor to misrepresent the significance of her findings. For high-cost (low-cost) projects she wishes to amplify (suppress) significance. To restore incentives for honest reporting, the advisor must receive an additional payment that offsets her incentive to equivocate. For high-cost projects the sponsor optimally mitigates expected agency rents by committing to ignore reports of highly significant findings, while for low-cost projects he ignores reports of mild significance. This continues to hold even in a setting where the sponsor has limited commitment power.

Keywords: information acquisition, p-hacking, reporting bias, scoring rule

JEL Classification: C73, D81, D82, D86, L14

Suggested Citation

Häfner, Samuel and Taylor, Curtis R., On Young Turks and Yes Men: Optimal Contracting for Advice (September 5, 2019). Available at SSRN: https://ssrn.com/abstract=3229927 or http://dx.doi.org/10.2139/ssrn.3229927

Samuel Häfner (Contact Author)

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Curtis R. Taylor

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1827 (Phone)
919-684-8974 (Fax)

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