Potential Strategies for Inducing Honest Reporting in Hiring Agents for Unverifiable InformationPublished on Thu Sep 07 2023 by Dustin Van Tate Testa 20230310-FPAC-LM-0006 | U.S. Department of Agriculture on Flickr
New research has explored the dynamics of buying opinions and the challenges faced by individuals when hiring agents for acquiring unverifiable information. The study, titled "Buying Opinions," delves into the contracting problem between principals and agents, where principals seek advice based on soft or unquantifiable evidence. The researchers investigate a scenario in which the true state is known but uncontractible, meaning the agent's findings cannot be credibly disclosed or contracted upon.
The findings of the paper are significant as they demonstrate that even though the agent's learning and discoveries are not contractible, the principal can still induce the agent to acquire the desired information and report honestly. The paper highlights that risk neutrality, reasonable information acquisition costs, and the potential for substantial penalties can lead to achieving the first-best outcome, where the principal obtains the information they desire most efficiently. This result is in contrast to previous studies where effort levels were not always implementable in the second-best world.
Moreover, the research shows that when the agent's outside option is sufficiently low, and negative transfers are allowed, any distribution over posteriors can be implemented at the first-best cost, even in cases where there is hidden learning and unverifiable evidence. However, if negative transfers are forbidden and the outside option is relatively low, it becomes inefficient for the principal to acquire information through the agent. The paper delves into the optimal incentives required for the agent's learning to take place in various scenarios, considering risk aversion on the part of the agent, limited liability, and the possibility of an interim exit. The research also delves into practical applications of the model and related literature.
Overall, the study provides valuable insights into the dynamics of buying opinions and the challenges faced when acquiring unverifiable information. It showcases how principals can effectively induce agents to acquire the desired information and report honestly, even in situations with hidden learning and unverifiable evidence. The research offers valuable guidance for individuals hiring agents for advice, showing that with appropriate incentives and conditions, principals can attain their intended outcomes efficiently.