A Theory of Blanket Recommendations
37 Pages Posted: 11 Oct 2018
Date Written: September 19, 2018
“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: Suggested Citation