Little White Lies–The Value Of Inconsequential Chatter

This paper deals with the problem of providing adequate incentives to an expert who might be tempted to conceal his true opinion because of his desire to appear competent. We show that if a competent expert never makes mistakes, the incentive problem will disappear if the interaction lasts long enough. However, if a competent expert occasionally makes mistakes, the opposite obtains: There will always arise an incentive problem if the time horizon is sufficiently long. We furthermore demonstrate that the decision maker can address the incentive problem by letting the expert accumulate some private information about his ability, and that doing so is optimal if the competent expert never makes mistakes.