the man(ager) who knew too much · the man(ager) who knew too much snehal banerjee uc san diego...
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The Man(ager) Who Knew Too Much
SnehalBanerjeeUCSanDiego
JesseDavisUNCChapelHill
NaveenGondhiINSEAD
March2020
Asymmetric Information and Communication within firms Firmsoperateunderincompleteandasymmetricinformation:
- “ontheground”employeesproduceinformationaboutfundamentalse.g.,productdemand,operationalconstraints,newtechnologies
- decisionsaremade“atthetop”byexecutivesandowners
Communicationofinformationiskeytoperformance
Economicsresearchhasfocusedonhowmisalignedincentives,contractualincompletenessandorganizationalfrictionslimiteffectivecommunication…
…buthasignoredaubiquitousregularityexhibitedbyindividuals,withprivilegedinformation:
“thecurseofknowledge”
The Curse of Knowledge Informedexhibitthe“curseofknowledge”whenforecastingothers’beliefs
Hardtoaccountforthefactthatyoudon’tknowwhatIknow
Examples:– Evaluatingforecastersafteracrisis:“shouldhaveseenitcoming”– Ineffectiveteacherswhobelieve“simple”topicsshouldbe“obvious”
Pervasiveandrobustcognitivebiasinforminghigher-orderbeliefs
Expertsarepoorcommunicators:assumeconclusionsare“trivial”
– Teachers,Politicians,Scientists,Economists
What we do Modelofintra-firmcommunicationtostudyhow“curseofknowledge”affects
(i)communication,(ii)informationproduction,and(iii)controlrights
Firmconsistsofprincipalandmanager(agent)
– Managerexertsefforttoacquireinfoaboutprojectproductivity– Managerwantstoover-investinprojectandexhibitscurseofknowledge– Managercommunicateswithprincipal– Principalchoosesinvestment
Communication:costlycommunicationvscheaptalk
ControlRights:Delegationvs.Communication
What we find (1)Thecurseofknowledgehamperscommunication
Lesseffortforcostlycommunication,lessinformativecheaptalk
(2)Thecurseofknowledgeimprovesinformationproduction
Moreeffortexertedforinformationacquisition
(3)Acursedmanagercanincreasefirmvalue
• Especially,whenincentivesarewell-aligned,andcurseisnottoolarge• Themanagercanproducerelevantinformation(e.g.,R&D,consultants)• Theprincipalmaychoosetodelegatetoacursedmanager,butnottoanunbiasedone
Background and Motivation
Perspective taking and the Curse of Knowledge Perspectivetakingor“puttingyourselfinsomeoneelse’sshoes”
Perceivingasituation/understandingaconceptfromanotherperspective
- Perceptual:Visual,Auditory- Conceptual:Thoughts,feelings,attitudes
Criticalforsocialinteractionsandcommunication
Whenforminghigher-orderbeliefs,peoplefinditdifficultto:
• Imagineothersknowwhatwedon’tknow(canleadto“winner’scurse”)• Imagineothersdon’tknowwhatweknowi.e.,“curseofknowledge”CurseofKnowledge≈“hindsightbias”and“knewitallalongeffect”
Examples
ForthoseofuswhorememberlifebeforeGoogleMaps!
Curse of knowledge is ubiquitous and difficult to correct Evaluatingforecasts/diagnoses/liability• Hastie,Schkade,andPayne(1999):Jurorsdecidingnegligence• Anderson,Jennings,Lowe,andReckers(1997):Judgesevaluatingauditors• Arkes,Wortmann,Saville,&Harkness(1981):Physiciansover-estimatelikelihoodof“known”outcome,eventhoughex-anteunlikely
• Kennedy(1995):Auditorsover-estimateabilitytopredictbankruptcyex-post
Expertsarepoorcommunications• Politicians,Scientists,Economists• Teacherswho“movetoofast”“skipsteps”“toomuchmaterial”“notclearenough”• Over-estimatemessageinformativeness/abilityofaudience• Particularlybadatforecastingperformanceofnovices(e.g.,Hinds,1999)
Debiasing:Warnings,Feedback,Accountabilityhavelimitedimpact
(Some) Related Literature Relativelysmallliteratureineconomicsexploring“curseofknowledge”
Camerer,LoewensteinandWeber(1993):exploreeffectsinamarketsetting
• ArgueCoKcanalleviatethelemon’sproblem,andenhancetradeMadarasz(2011):Considerssettingwherereceiverhascurseofknowledge
• Receiverevaluatesexpertsusingex-postinfo,underestimatesability• Communication:Biasedexpertspeakstoorarelyandtechnically,underestimatesabilityofaudience
Broadlyrelatedtolargeliteratureonstrategiccommunication,disclosure,delegation
The Model
A definition SupposeAdamisbetterinformedthanBethi.e.,info.set𝐼!isfinerthan𝐼"
AdamexhibitsthecurseofknowledgeifhispredictionofBeth’sforecastis
𝐸!"𝐸"[𝑋]& = (𝟏 − 𝝎)𝐸[𝑋|𝐼"] + 𝝎𝐸[𝑋|𝐼!]
i.e.,Adamcannotignoretheinformationheknows(butBethdoesn’t)
Parameter𝜔 ∈ (0,1)characterizesthedegreeofthecurseofknowledge
Note:LawofIteratedExpectations:𝜔 = 0 ⇔𝐸![𝐸"[𝑋]] = 𝐸[𝑋|𝐼"]
Setup 1 – Firm Payoffs Firmvalueis
𝑉(𝑅, 𝑘) = 𝑅𝑘 −12𝑘#
where𝑘representsinvestment(capital)and𝑅reflectsproductivity:
Productivityisgivenby𝑅 = 𝜇 + 𝜃:
– 𝜇ispriorexpectedproductivity(known)and
– 𝜃 ∼ 𝑈 <− $#, $#=isalearnableshocktoproductivity
Giveninformationset𝐼,optimalactionisconditionalexpectationof𝑅i.e.,
𝑘∗ = 𝐸[𝑅|𝐼] = 𝜇 + 𝐸[𝜃|𝐼]
Setup 2 – Preferences and Beliefs (1)Principal(𝑝)wantstochooseinvestmenttomaximizefirmvaluei.e.,
𝑚𝑎𝑥&𝐸B𝑉(𝑅, 𝑘)C𝐼'D ⇒ 𝑘' = 𝜇 + 𝐸[𝜃|𝐼']
(2)Manager(𝑚)hasabias𝒃 ≥ 𝟎towardsover-investmenti.e.,
𝑚𝑎𝑥&𝐸[𝑉(𝑅, 𝑘) + 𝑏𝑘|𝐼(] ⇒ 𝑘( = 𝜇 + 𝐸[𝜃|𝐼(] + 𝑏
andexhibitscurseofknowledgei.e.,if𝐼(isfinerthan𝐼',then
𝐸'B𝐸([𝜃]D = (𝟏 − 𝝎)𝐸B𝜃C𝐼'D + 𝝎𝐸[𝜃|𝐼(]
Setup 3 – Information Managercanpayacost𝑐(𝑝)toproduceasignal𝑥ofprecision𝑝:
𝑥 = M𝜃, withprobability𝑝𝜉, withprobability1 − 𝑝
where𝜉 ∼ 𝑈 <− $#, $#=isindependentof𝜃 “truthornoisesignal”
Note:Weareabstractingawayfromcommonlyknowninformation
Communication:Managersendsmessage𝑑(𝑥),principalinvests𝑘'(𝑑)
- Costlycommunicationwithcommitment- Cheaptalk
Delegation:Managerinvests𝑘((𝑥)
Costly Communication
Themanagercommitsex-antetoanoisymessage𝑦about𝑥withmessage
precision𝜌bypayingacost𝜅(𝜌):
𝑦 = M𝑥, withprobability𝜌𝜂, withprobability1 − 𝜌
where𝜂 ∼ 𝑈 <− $#, $#=isindependentof𝑥
Managerchoosesmessageprecision𝝆andinformationprecision𝒑tomaximize:
𝑚𝑎𝑥),'
𝐸([𝑉(𝑅, 𝑘'(𝑦)) + 𝑏𝑘'(𝑦)] − 𝑐(𝑝) − 𝜅(𝜌)
Cheap talk Managercannotcommittoasignalex-ante
Instead,hesendsacheaptalkmessage𝒅(𝒙)tomaximize:
𝑢((𝑥) ≡ 𝑚𝑎𝑥+𝐸([𝑉(𝑅, 𝑘'(𝑥)) + 𝑏𝑘'(𝑑)|𝑥]
andoptimallychoosesinformationprecision𝒑tomaximize:
𝑚𝑎𝑥'𝐸'[𝑢((𝑥)] − 𝑐(𝑝)
Modelisstylizedfortractability(signalstructure,linear-quadraticvalue,…)
Interpretation:
1.Managerandprincipalstartwithsomecommoninformation(context)
2.Managerproducescostly,incremental,privateinformation𝑥withprecision𝑝
3.Managersendsareport𝑑(𝑥)
• Costlycommunication:𝜌reflectshowwellreport“makesthecase”• “showingthesteps”/makingthecaserequireseffort
• Cheaptalk:credibilityofthereport
CurseofKnowledge:
Managerover-estimateshow“obvious”𝑥is,givencontext/commoninfo
Communication
Costly Communication Optimalmessageprecision𝜌maximizes𝑢e((𝜌) − 𝜅(𝜌),where
𝑢e((𝜌, 𝑝) ≡ 𝐸(B𝑉f𝑅, 𝑘'(-)g + 𝑏𝑘'(𝑝)D@
= 𝑏𝜇 +𝜇#
2 +𝜎#
24𝑝#f1 − (1 − 𝜔)#(1 − 𝜌#)g
• Utilityincreasesinmessageprecision𝜌andinformationprecision𝑝
Moreprecisecommunication/informationincreasesfirmvalue
• MarginalutilityofcommunicationincreasesinsignalprecisionCommunicationandinformationacquisitionarecomplements
Result 1: Under-investment in Communication Result:Cursedmanagerunder-investsincommunicationprecision𝜌
𝜕#𝑢e(𝜕𝜌𝜕𝜔
=𝜕𝑀𝑈(𝜌)𝜕𝜔
< 0
Intuition:
“therightanswerisobviousfromcontext,
soIdon’tneedtoexplainitbetter!”
Consistentwithnarrativeaboutexpertsbeingpoorcommunicators
- Reportsandpresentationsareunclearandfilledwithjargon- Assumethataudiencehas“readthepaper/textbook”
Communication without costs
Curseofknowledgehamperscostlycommunication,butwhatiftalkischeap?
WeshowthereisaCrawford-Sobel,partitionequilibrium:
Apartitionequilibriumwith𝑁partitionsconsistsofcutoffs−𝜎/2 = 𝑠! < 𝑠" <. . . 𝑠# =
𝜎/2,suchthatforall𝑥 ∈ [𝑠$%", 𝑠$],(i)themanagersendsthesamemessage𝑑(𝑛),and
(ii)theprincipaltakesthesameaction𝑘&(𝑛) = 𝜇 + 𝐸[𝜃|𝑥 ∈ [𝑠$%", 𝑠$]]
Result:Thereexistsapositiveinteger
𝑁!"# = ceil#−12+12(1 + 2
𝝈𝒑(𝟏 −𝝎)𝒃 0
suchthatforevery1 ≤ 𝑁 ≤ 𝑁(/0 ,thereexistsapartitionequilibriumwith𝑁
partitions.
Note:When 𝒃𝝈𝒑(𝟏5𝝎)
> 78,thentheonlyequilibriumisuninformative.
Credibility and the effective bias
Credibility/Informativenessdependsoneffectivebias:
𝒃𝝈𝒑(𝟏 − 𝝎)
Theeffectivebias:
• Increasesinover-investmentbias𝒃 strongerincentivestomislead
• Decreasesinprioruncertainty𝝈 communicationismorevaluable
• Decreasesininformationprecision𝒑 cheaptalkhasmorecontent
Result 2: Curse of knowledge ⇒ Less credible cheap talk
Result:Theeffectivebiasincreaseswiththecurseofknowledge𝜔
Intuition:
“therightanswerisobviousfromcontext,soIhaveastrongerincentivetodistortmyreport!”
Curseofknowledgeharmscommunication,evenwhenitrequiresnoeffort!
Increasein𝜔reducesinformativenessthroughchannels:
(i)Decreasesthemaximalnumberofpartitions
𝑁'() = ceil9−12 +
12;1 + 2
𝜎𝑝(1 − 𝜔)𝑏 ?
(ii)Forafixednumberofpartitions𝑁,inducesmorepoolingatthetop
Information Production
Sincecurseofknowledgehamperscommunication,doesitmakeinformation
lessvaluable?
Result 3: Over-investment in information acquisition Withcostlycommunication,expectedutilityis:
𝑢e( ≡ 𝑏𝜇 +𝜇#
2 +𝜎#
24𝑝#f1 − (1 − 𝜔)#(1 − 𝜌#)g
Result:Cursedmanagersover-investininformationproductioni.e.,
𝜕#𝑢e(𝜕𝑝𝜕𝜔
=𝜕𝑀𝑈(𝑝)𝜕𝜔
> 0
Intuition:
“SinceI’mgoodatconveyingtherightanswer,
doingresearchismorevaluable”
Over-estimateabilitytocommunicate⇒strongerincentivetoexerteffort
Result 4: A cursed manager can increase firm value Expectedvalueincreasesinbothinformationprecisionandmessageprecision
𝐸[𝑉(𝑅, 𝑘&)] =𝜇*
2 +𝜎*
24𝑝*𝜌*
• Fixedinformationprecision𝑝:cursedmanagersdecreasevalue• Endogenousinfo.precision𝑝:cursedmanagerscanincreasevalue
when𝜔isnottoohigh
Figure 3: Optimal communication and information acquisition under costly communicationThe figure plots the choice of message precision ⇢ (dashed), acquired information precisionp (solid), and expected value of the firm E [V (R, k)] under costly communication, as afunction of the degree of cursedness. The manager optimally chooses message precision ⇢subject to a cost (⇢) = 0
⇢2
1�⇢ and chooses acquired information precision p subject to a
cost c (p) = c0p2
1�p . The other parameters of the model are set to: µ = 1, b = 0.02, � = 1and c0 = 0.01 and 0 = 0.001.
0.2 0.4 0.6 0.8 1.0
0.1
0.2
0.3
0.4
0.5
0.6
0.2 0.4 0.6 0.8 1.00.500
0.501
0.502
0.503
0.504
(a) ⇢ (dashed) and p (solid) vs ! (b) Expected value vs !
c (p) = c0p2
1�p , as before, we assume that the manager’s cost of communicating with precision
⇢ is give by (⇢) = 0⇢2
1�⇢ . The figure plots the optimal choice for both precisions, ⇢ (dashed)
and p (solid), and the expected firm value as a function of the manager’s curse of knowledge,
!.
In this example, there is very little information acquisition or communication when the
manager is rational (i.e., when ! = 0). As ! increases, the marginal utility from information
acquisition increases and the marginal utility from message precision decreases. When ! is
su�ciently large (when ! ⇡ 0.1 in panel (a)), however, this is o↵set by the complementarity
across precisions and so both p and ⇢ quickly increase with !. As panel (b) illustrates, this
leads to an increase in the firm’s expected value since the manager is now acquiring and
communicating more precise information. Notably, this suggests that small changes in the
manager’s bias can lead to large changes in informational e�ciency and firm value.
As the curse of knowledge increases further, the o↵setting impact of the complementarity
begins to dissipate: eventually (when ! ⇡ 0.2) this leads to (i) higher information acquisition,
and (ii) lower message precision. Note that, even in this region, the expected value of the
firm continues to rise, until the rate at which the message precision decreases outweighs the
informativeness of the manager’s signal (near ! ⇡ 0.3). Eventually, the manager’s curse
of knowledge is su�ciently high to drive the optimal choice of message precision to nearly
zero. From this point forward, the expected value of the firm remains relatively insensitive
21
Figure 3: Optimal communication and information acquisition under costly communicationThe figure plots the choice of message precision ⇢ (dashed), acquired information precisionp (solid), and expected value of the firm E [V (R, k)] under costly communication, as afunction of the degree of cursedness. The manager optimally chooses message precision ⇢subject to a cost (⇢) = 0
⇢2
1�⇢ and chooses acquired information precision p subject to a
cost c (p) = c0p2
1�p . The other parameters of the model are set to: µ = 1, b = 0.02, � = 1and c0 = 0.01 and 0 = 0.001.
(a) ⇢ (dashed) and p (solid) vs ! (b) Expected value vs !
c (p) = c0p2
1�p , as before, we assume that the manager’s cost of communicating with precision
⇢ is give by (⇢) = 0⇢2
1�⇢ . The figure plots the optimal choice for both precisions, ⇢ (dashed)
and p (solid), and the expected firm value as a function of the manager’s curse of knowledge,
!.
In this example, there is very little information acquisition or communication when the
manager is rational (i.e., when ! = 0). As ! increases, the marginal utility from information
acquisition increases and the marginal utility from message precision decreases. When ! is
su�ciently large (when ! ⇡ 0.1 in panel (a)), however, this is o↵set by the complementarity
across precisions and so both p and ⇢ quickly increase with !. As panel (b) illustrates, this
leads to an increase in the firm’s expected value since the manager is now acquiring and
communicating more precise information. Notably, this suggests that small changes in the
manager’s bias can lead to large changes in informational e�ciency and firm value.
As the curse of knowledge increases further, the o↵setting impact of the complementarity
begins to dissipate: eventually (when ! ⇡ 0.2) this leads to (i) higher information acquisition,
and (ii) lower message precision. Note that, even in this region, the expected value of the
firm continues to rise, until the rate at which the message precision decreases outweighs the
informativeness of the manager’s signal (near ! ⇡ 0.3). Eventually, the manager’s curse
of knowledge is su�ciently high to drive the optimal choice of message precision to nearly
zero. From this point forward, the expected value of the firm remains relatively insensitive
21
Result 3’: Cursed managers acquire more information
Withcheaptalk,expectedutilityis:
𝑢e( ≡12𝐸(
r𝐸([𝑅 + 𝑏|𝑥]# − s𝐸([𝑅 + 𝑏|𝑥] − 𝑘'f𝑑(𝑥)gt#u
Result:Holding𝑏fixed,utilityincreasesinperceivedinformativenessof𝑑
• Utilityincreasesintrueinformativenessi.e.,𝑁and𝑝
• Utilityincreaseswithcurseofknowledge𝜔
• Forafixed𝑁,acursedmanageracquiresmoreinformationi.e.,
𝜕#𝑢(𝜕𝑝𝜕𝜔
=𝜕𝑀𝑈(𝑝)𝜕𝜔
> 0
Fixing𝑁,asmallincreasein𝜔 ⇒increaseinformationprecision
But,sufficientlylargeincreasein𝜔 ⇒decreasein𝑁(/0andinfo.precision
Sawtoothpatterninoptimallychoseninformationprecision
Result 4’: Cursed managers can increase firm value Expectedvalueincreaseswithinformativenessandcommunication:
𝐸[𝑉(𝑅, 𝑘'(𝑑)] = 7#(𝜇# + var(𝜃) − 𝐸[var(𝜃|𝑑)])
• Decreaseswithcurseofknowledgewithexogenousinformationprecision• Canincreasewithcursewheninfoprecisionisendogenous
Whencurse𝜔isnottoolarge,infoproductiondominatescommunication
Delegation versus Communication
Result 5: Delegate if and only if bias is sufficiently small
Result:Withexogenousinformation/messageprecision,thedelegation
decisiondoesnotdependonthecurseofknowledge
• Costlycommunication:Delegateiff
𝑏# <𝑝#𝜎#(1 − 𝜌#)
12
• Cheaptalk:Delegateiff
𝑏# <𝑝#𝜎#
12
Note:Commitmentimprovescomm⇒Delegatemoreoftenwithcheaptalk
Withendogenousprecisionchoice,curseofknowledgeaffectsinfoprecision,andsoaffectsdelegationdecision
Theprincipalmayretaincontrolwitharationalmanager(𝜔 = 0),butdelegatetoacursedone
CostlyCommunication CheapTalk
Otherparameters:𝜇 = 1, 𝜎 = 1, 𝑐! = 0.02, 𝜅! = 0.001
Extension: Verifiable Disclosure “Intermediatecase”betweencheaptalkandcommitment
Result:“Disclosureontop”versus“Disclosureatextremes”
(i) When 9$'(75:)
≥ 𝐵∗,managerdisclosesiff𝑥 ≥ 𝑥
(ii) When 9$'(75:)
< 𝐵∗,managerdisclosesiff𝑥 ≥ 𝑥OR𝑥 ≤ 𝑥
Result:Forfixedprecision𝒑,curseofknowledgereducesdisclosureandvalue
Result:Fixingequilibrium,higher𝝎canleadtohigherinformationacquisition,sovalueisnon-monotonicwith𝝎
Result*:Delegationdecisiondependson𝝎,evenwithfixed𝒑,fordisclosureatextremesequilibrium
Conclusions
Isthecurseofknowledgereallyacurseorablessing?
Asymmetricinformation⇒Curseofknowledge
Cursedmanagersreducefirmvaluewhen:
– Informationprecisionisexogenous(e.g.,reporting,riskmanagement?)
– Incentivesaremisaligned
– Informalinternalcommunication(lackofcommitment)
Cursedmanagerscanincreasefirmvaluewhen:
– Informationprecisionisendogenous(e.g.,marketresearch,R&D)
– Curseisnottoolargeandincentivesarewell-aligned
– Formalcommunicationsystems(abilitytocommit)
Enhancing/fosteringcommunicationencourageseffortinexpertise
Cursed Academics? Curseofknowledgeprovidesoneexplanationforwhymanyexcellentresearchersarealsobadatteaching– Morecursedacademicsoverinvestinexpertise,underinvestinteaching
Analysishighlightscomplementarityinresearchandteaching
Justlikeyourdeansays!
Encouragingbetterteachingpracticesmayimproveresearchproductivity
– Whatdoesn’twork:Warnings,feedback,experience– Whatdoeswork:Consideringalternativeoutcomes(counter-explanation)
Thank you!
Extension: Verifiable Disclosure
Suppose𝑚observes𝑥withprobability𝑞,andnothingotherwise
– Aninformedmanagercanchoosewhethertodisclosenothing(𝑑 = ∅)or
disclosethesignalperfectly(𝑑 = 𝑥)
– Anuninformedmanagercannotverifiablydiscloseheisuninformed
Denotetheequilibriumbeliefafterno-disclosureby𝜇∅ = 𝐸[𝜃|𝑑 = ∅].
Optimalinvestmentbyprincipal:
𝑘'(𝑑) = M𝜇 + 𝑝𝑥, if𝑑 = 𝑥𝜇 + 𝜇∅, if𝑑 = ∅
But,manager’scurseofknowledgeimplies:
𝐸([𝑘'(𝑑)|𝑥, 𝑑 = ∅] = 𝜇 + (1 − 𝜔)𝜇∅ + 𝜔𝑥
Result:Let𝐵∗ = %&'('(&'()+(
.
1. If ,-.(&'/)
> 𝐵∗,thenthereexists𝑥 ∈ (−𝜎/2, 𝜎/2),suchthatthemanagerdisclosesiff𝑥 ≥ 𝑥
(“disclosureontop”)
2. If ,-.(&'/)
≤ 𝐵∗,thenthereexists�̄� < 𝑥 ∈ (−𝜎/2, 𝜎/2),suchthatthemanagerdisclosesiff𝑥 ≥
𝑥or𝑥 ≤ �̄�(“disclosureatextremes”)
Intuition:
benefitsfromhigherinvestment(nodisclosure)
vs.
highervaluefrommoreinformedinvestment(disclosure)
Whenbiasissufficientlylarge,wehavestandard,disclosureontop
Whenbiasissmall,wehavedisclosureatextremes
• Smallerbias⇒informedinvestmentdominateswhenxissufficientlylow
• Smallerbias⇒Disclosureismoreinformative(fulldisclosurewhenb=0)
Impact of curse of knowledge on expected value
Effectivebias 9$'(75:)
increaseswiththecurseofknowledge
• Whenbiassufficientlylow,disclosureregiondecreaseswith𝜔• Whenbiassufficientlyhigh,disclosureregionisinsensitiveto𝜔
Intuition:Cursedmanagerbelievesrightansweris“obvious”
⇒incentivetowithholddisclosureishigher
Result:Forfixedsignalprecision𝒑,expectedvalueis:
• unaffectedby𝜔for“disclosureontop”equilibrium• decreasingin𝜔for“disclosureatextremes”equilibrium
Endogenous Information Acquisition
Result:Holding𝒃fixed,utilityincreasesinperceivedinformativenessof𝒅:
• Utilityincreaseswithtrueinformativeness(i.e,𝑝)
• Utilityincreaseswiththecurseofknowledge𝜔
Forfixedequilibrium,utilityincreasesmorewith𝑝forcursedmanageri.e.,
𝜕#𝑢(𝜕𝑝𝜕𝜔
> 0
Moreover,utilityishigherforthedisclosureatextremesequilibrium
Aswithcheaptalk,anincreaseincursednesscanincreasefirmvalueby
increasinginformationacquisition!
Cursed managers may increase firm value Forfixedprecision,curse(weakly)decreasesvaluevialessdisclosure
But,italsoincreasesmarginalvalueofinformationprecision,whichcanincreaseinformationproduction
Result:Delegationdecisiondependsoninformativenessofequilibriumdisclosure:
(i) Forthe“disclosureontop”(lessinformative)equilibrium,delegateiffover-investmentbiasissufficientlysmall
(ii) Forthe“disclosureatextremes”(moreinformative)equilibrium,delegateiffcurseofknowledgeissufficientlylarge
Disclosureontopequilibrium:
Forfixed𝑝,delegationdecisionindependentofcurseofknowledge𝜔(likecheaptalk)
Disclosureatextremesequilibrium:
Forfixed𝑝,disclosureintervaldependson𝜔,andsodoesdelegationdecision