Biased recommendations from biased and unbiased experts

• Published in: Journal of economics & management strategy Vol. 28; no. 3; pp. 520 - 540
• Main Authors: Chung, Wonsuk, Harbaugh, Rick
• Format: Journal Article
• Language: English
• Published: Cambridge Wiley Subscription Services, Inc 01.06.2019
• Subjects: Action; Bias; cheap talk; Discounts; Economic models; Experts; Incentives; Lying; pandering; Persuasion; political correctness; Symmetry; Transparency
• ISSN: 1058-6407; 1530-9134
• DOI: 10.1111/jems.12293

When can you trust an expert to provide honest advice? We develop and test a recommendation game where an expert helps a decision maker choose among two actions that benefit the expert and an outside option that does not. For instance, a salesperson recommends one of two products to a customer who may instead purchase nothing. Subject behavior in a laboratory experiment is largely consistent with predictions from the cheap talk literature. For sufficient symmetry in payoffs, recommendations are persuasive in that they raise the chance that the decision maker takes one of the actions rather than the outside option. If the expert is known to have a payoff bias toward an action, such as a salesperson receiving a higher commission on one product, the decision maker partially discounts a recommendation for it and is more likely to take the outside option. If the bias is uncertain, then biased experts lie even more, whereas unbiased experts follow a political correctness strategy of pushing the opposite action so as to be more persuasive. Even when the expert is known to be unbiased, if the decision maker already favors an action the expert panders toward it, and the decision maker partially discounts the recommendation. The comparative static predictions hold with any degree of lying aversion up to pure cheap talk, and most subjects exhibit some limited lying aversion. The results highlight that the transparency of expert incentives can improve communication, but need not ensure unbiased advice.