Wednesday, February 17, 2016

Disclosing Conflicts of Interest: Loewenstein, Cain, and Sah (2011)

George Loewenstein, Daylian M. Cain, and Sunita Sah, “The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest.” American Economic Review 101(3): 423–428, 2011 [pdf available here].

• Disclosure of conflicts of interest to customers would presumably eliminate any potential problems with such conflicts, if customers were standard rational actors. 

• But how do people respond to mandated disclosures? Those providers who have conflicts might increase the bias in their advice, realizing that their advice will tend to be discounted. They might even feel that the disclosure provides them with a “moral license” to mislead. 

• The recipients of the disclosure might think that the disclosure itself is a signal that the provider must be trustworthy. Further, they recognize that the rejection of the provider’s advice is now a sort of tacit accusation that the provider is corrupt – and people are wary of sending such signals. The desire to help out the provider might also push consumers to accept the conflicted advice. 

• The authors describe some experiments in which mandatory disclosure of conflicts of interest did indeed lead to worse advice, and acceptance of worse advice, with degraded outcomes for consumers (relative to when conflicted advisors were not required to disclose their conflicts.) 

• If the disclosures were not made by the provider, but by someone else, then consumers were better able to respond appropriately. It appears that it is when there is “common knowledge” of the conflict – the provider knows it, the consumer knows it, the provider knows that the consumer knows it, etc… – that the consumer’s incentive to go along with the biased advice is maximized. More time to respond to biased advice – a sort of cooling-off period – also is helpful to consumers. 

• An in-depth follow-up article on disclosure previously received the BE Outlines treatment.

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