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Evolving Influence: Resolving Extreme Conflicts of Interest in Advisory Relationships

Raphael Boleslavsky, University of Miami
Tracy Lewis, Fuqua School of Business, Duke University

Abstract

An advocate for a special interest provides advice to an uninformed planner for her to consider in making a sequence of decisions. Although the advocate may have valuable information for the planner, it is also known that the advocate is interested only in advancing his cause and will distort his advice in order to influence the planner's decision. Each time she repeats the problem, however, the planner learns about the accuracy of the advocate's recommendation, mitigating some of the advocate's incentive to act in a self-serving manner. We propose a theory to explain why planners do sometimes rely on information provided by advocates in making decisions. We establish that the capability to commit to actions is necessary to overcome the advocate's extreme conflict of interest and characterize the optimal evolution of influence in the relationship. We also show that if information is costly to acquire, the planner may prefer to consult an advocate rather than learn on her own. Our results have implications for a variety of real world interactions including regulation, organization, and consumer protection.

Suggested Citation

Raphael Boleslavsky and Tracy Lewis. 2011. "Evolving Influence: Resolving Extreme Conflicts of Interest in Advisory Relationships" Revision requested, RAND Journal of Economics
Available at: http://works.bepress.com/rboleslavsky/3