How policymakers seek advice?

I came across this fascinating paper from Norges Bank economists on factors affecting policymakers seeking advice. 

 

Decisionmakers usually seek advice from other people. How decisionmakers take advice into account is an issue that has been subject to considerable research in organizational behavior, psychology, economics, and other areas. This paper considers one feature  found in empirical studies about how decisionmakers use advice, which Yaniv (2004) labeled distance effect. The distance effect is characterized by a negative relationship between the weight placed on the received advice and the difference between the advice and the decisionmaker’s initial opinion.

 The authors point to various papers which look at this distance effect. The other papers say this distance effect violates rationality.  However, the authors model this behavior and call it rational. The authors say that a decision maker is more aware of his abilities than the adviser. So, palces more weight on his decision. The greater the information asymmetry between the two, more the policymaker would rely on his thinking.

In this paper, we offer an alternative explanation of the distance effect. If the decisionmaker is more confident about estimating her own competence than she is about gauging the advisor’s competence, it follows from optimal signal extraction that a small distance between the decisionmaker’s prior expectation and the advisor’s recommendation would make the decisionmaker upwardly adjust her estimate of the advisor’s relative competence, and thereby the weight put on the advice. Equivalently, a large distance would make the decisionmaker downgrade the advisor’s relative competence. In our model, the existence of the distance effect hinges on an information asymmetry. We have argued that this type of information asymmetry is reasonable in practice, as people generally would be better informed about their own competence than about other people’s competence.\

I thought all this to be pretty natural. But still you need to show it using models. Anyways, the other applications are pretty interesting as well:

 

In this paper, we have focused solely on the signal extraction problem of the decisionmaker and assumed that the advisor gives honest advice. However, in the principal agent literature, the focus is on agent’s incentives to act strategically. An example is Prendergast’s (1993) theory of “yes men”, where she showed that it could be optimal for the principal to specify a contract that gives the agent’s incentives to report judgments that are closer to their estimate of the principal’s opinion (thereby meriting the term “yes men”). Our explanation of the distance effect gives, however, an alternative reason for the behavior \yes men”.  

To see this, assume that the advisor’s incentives are to maximize the weight that the decisionmaker puts on the advice. For example, the advisor’s salary could depend on the decisionmaker’s perception of the advisor’s competence. If there is a distance effect, and the decisionmaker thinks that the advisor is honest, meaning the advisor would have an incentive to report a signal that is equal to the decisionmaker’s signal, since this would maximize the decisionmaker’s perception of the advisor’s competence. The existence of the distance eff ect therefore makes the case for “yes men”-like behavior stronger than it appears in the existing literature, since in Prendergast (1993), the agent would report signals that are biased toward the principal’s opinion but are not equal to the principal’s opinion.

Exciting stuff. Policymakers/ Various Govt officials are advised by so many experts. We generally don’t think of various economic reasons and relation between the two roles. This paper has got me thinking of the same.

 

Advertisement

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: