A Theory of Blanket Recommendations

37 Pages Posted: 11 Oct 2018

See all articles by Doron Levit

Doron Levit

University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI)

Anton Tsoy

Einaudi Institute for Economics and Finance

Date Written: September 19, 2018

Abstract

“One-size-fits-all” recommendations are common in many contexts, including those with a widespread heterogeneity. We propose a model that rationalizes this phenomenon. An expert recommends two agents whether to adopt a policy. The expert is privately informed about the benefit of the policy to each agent, but also about the bias in his judgment. We show that a blanket recommendation arises endogenously in equilibrium even though the benefits from the policy are independent across agents. A blanket recommendation allows the expert to conceal his bias, thereby increasing his influence. This result is robust to the introduction of disobedience costs or having more than two agents. We discuss the application of the model to economic reforms proposed by the IMF and the World Bank, voting guidelines by proxy advisory firms, policy recommendations of the Basel Committee on Banking Supervision, central bank communications, and mentoring.

Keywords: Recommendation, Cheap Talk, Advice, IMF, World Bank, Basel Committee, Proxy Advisors, Central Bank

JEL Classification: D74, D83, G23, G32, G34

Suggested Citation

Levit, Doron and Tsoy, Anton, A Theory of Blanket Recommendations (September 19, 2018). Available at SSRN: https://ssrn.com/abstract=3251742 or http://dx.doi.org/10.2139/ssrn.3251742

Doron Levit

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Anton Tsoy (Contact Author)

Einaudi Institute for Economics and Finance ( email )

Via Sallustiana 62
Rome, 00187
Italy

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