A Theory of Advice Based on Information Search Incentives

Philippe Marcoul ()

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper investigates whether recourse to a consultant always enhances decision making. Advice given by a consultant changes the manager’s belief about his own decision-making ability. This change in belief alters the manager’s incentives to make a decision. Taking into account this effect, we characterize the contracts that the firm must offer to the manager when a consultant with a given expertise is hired. Surprisingly, we find that the benefit curve of the firm may decrease as the consultant expertise increases, even if there is no consulting fee. Moreover, we show that the value of advice depends on the “good fit” between the informativeness of the consultant and the manager’s incentives to reach the right decision.

Keywords: advice; value of information; information search; incentives (search for similar items in EconPapers)
JEL-codes: D82 D83 J30 (search for similar items in EconPapers)
Date: 2003-04-29
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:10357

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