On Young Turks and Yes Men: Optimal Contracting for Advice

42 Pages Posted: 29 Aug 2018 Last revised: 17 Jun 2021

See all articles by Samuel Häfner

Samuel Häfner

Web3 Foundation; University of St. Gallen

Curtis R. Taylor

Duke University - Department of Economics

Date Written: June 17, 2021

Abstract

We study optimal contracting for advice by an agent about how much a principal should invest in a project. The agent has to be provided with incentives both to conduct research and to honestly report her findings. To motivate research, the agent's compensation must include a contingent component linking her recommendation to the ultimate outcome of the project. This endogenously creates incentives for the agent to misrepresent the magnitude -- though not the direction -- of her findings. For high-cost (low-cost) projects she wishes to overstate (understate) the magnitude of her research findings. To restore incentives for honest reporting, the agent must receive an additional payment that depends only on her report. For high-cost projects the principal optimally mitigates the concomitant agency rents by committing to ignore extreme (Young-Turk) recommendations, while for low-cost projects he ignores mild (Yes-Man) ones. These findings are shown to be robust to several natural extensions of the model.

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

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 (June 17, 2021). Available at SSRN: https://ssrn.com/abstract=3229927 or http://dx.doi.org/10.2139/ssrn.3229927

Samuel Häfner (Contact Author)

Web3 Foundation

Zug
Switzerland

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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