The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest

Abstract

Conflicts of interest can lead experts to give biased and corrupt advice. Although disclosure is often proposed as a potential solution to these problems, we show that it can have perverse effects. First, people generally do not discount advice from biased advisors as much as they should, even when advisors' conflicts of interest are honestly disclosed. Second, disclosure can increase the bias in advice because it leads advisors to feel morally licensed and strategically encouraged to exaggerate their advice even further. This means that while disclosure may [insufficiently] warn an audience to discount an expert-opinion, disclosure might also lead the expert to alter the opinion offered and alter it in such a way as to overcompensate for any discounting that might occur. As a result, disclosure may fail to solve the problems created by conflicts of interest and it may sometimes even make matters worse.

This paper is part of a larger body of research which examines how trying to regulate ethical behavior (and/or trying to protect consumers) can potentially backfire.

Keywords: conflicts of interest, disclosure, advice, advising, moral licensing, altruism, consumer protection, regulation, ethics

JEL Classification: D18,D32,D40,D64,D70,D80,G18,G34,M30,M41,M45