When second opinions hurt: a model of expert advice under career concerns

Abstract

We develop a reputational cheap talk model where the principal might cancel an action initially recommended by the expert if she gets an un-favourable interim news. Once the status quo is reinstated, however, the principal is unable to verify the true state of the world. Since the expert wants to appear well-informed, we first study the effect of the interim news on the expert's reporting strategy. We find that the possibility of cancelling the reform encourages the less well informed expert to recommend it more often. We then show that having access to better interim news could reduce the welfare of the principal. Our model implies that delegating the decision rights to another person with different preferences can be used as a commitment device by the principal and might improve her welfare.