Opinions as Incentives

This post comes to us from Yeon-Koo Che of Columbia University and Yonsei University and Navin Kartik of Columbia University.


Difference of opinion would be obviously valuable if it inherently entails a productive advantage in the sense of bringing new ideas or insights that would otherwise be unavailable. But could it be valuable even when it brings no direct productive advantage? Moreover, are there any costs of people having differing opinions? In our forthcoming Journal of Political Economy paper entitled Opinions as Incentives, we explore these questions by examining the incentive implications of difference of opinion.

We employ a framework that captures common themes encountered by many organizations.  More specifically, we study a setting in which a decision maker, or DM for short, consults an adviser before making a decision. Both individuals’ payoff from the decision depends on some exogenous state of the world. We model the decision and the state as real numbers, where the DM’s payoff-maximizing decision is equal to the state. At the outset, however, neither the DM nor the adviser knows the state; they only hold some prior views about it. The adviser can exert costly effort to try and discover an informative signal about the state; the probability of observing such a signal is increasing in his effort. Effort is unverifiable, however, and higher effort imposes a greater cost on the adviser. After the adviser privately observes the information, he strategically communicates with the DM. Communication takes the form of verifiable disclosure: sending a message is costless, but the adviser cannot falsify information, or equivalently, the DM can judge objectively what a signal means. The adviser’s strategic choice therefore is whether or not to reveal any information he has acquired. Finally, the DM makes her decision given her updated beliefs after communication with the adviser.

Our main results concern a tradeoff associated with difference of opinion. To see the intuition, suppose first that effort is not a choice variable for the adviser. In this case, the DM has no reason to prefer an adviser with a differing opinion. In fact, unless the signal is perfectly informative about the state, the DM will strictly prefer a like-minded adviser, i.e. one with the same opinion as she has. This is because agents with different opinions will hold different posteriors about what the right decision is given a partially informative signal. Consequently, even though he shares the same fundamental preferences, an adviser with a differing opinion will typically withhold some information from the DM. This strategic withholding of information entails a welfare loss for the DM, whereas no such loss will arise if the adviser is like-minded. When effort is endogenous, the DM is also concerned with the adviser’s incentive to exert effort; all else equal, she would prefer an adviser who will exert more effort. We find that differences of opinion create incentives for information acquisition, for two distinct reasons. First, an adviser with a difference of opinion is motivated to persuade the DM. This motive does not exist for a like-minded adviser. Second, and more subtle, an adviser with a difference of opinion will exert effort to avoid rational prejudice. Consequently, an adviser with a difference of opinion has incentives to seek out information in order to avoid an adverse inference from the DM, a motive that does not exist for a like-minded adviser.

Equipped with this central tradeoff, we then refine our analysis to obtain two results that apply specifically to organization economics.

First, assuming that the DM can choose an adviser from a rich pool of different opinion types (including a like-minded type), we find that the DM should select an adviser with some difference of opinion over a perfectly like-minded one. The reason is that an adviser with a sufficiently small difference of opinion engages in only a negligible amount of strategic withholding of information, so the loss associated with such an adviser is negligible. By the same token, the prejudicial effect and its beneficial impact on information acquisition is also negligible when the difference of opinion is small. In contrast, the persuasion motive that even a slight difference of opinion generates and thus the benefit the DM enjoys from its impact on increased effort is non-negligible by comparison. Therefore, the DM derives a net benefit from an adviser with at least a little difference in opinion.

Second, we argue that lack of congruence (in terms of prior opinions, but also, to a lesser degree, preferences) can be beneficial to an organization, and this benefit can be harnessed only when authority remains in the hands of the principal. The reason is that delegation can be de-motivating for the adviser because it eliminates both incentive effects we have highlighted: the desire to persuade the DM and to avoid prejudice. The conclusion that emerges is a more nuanced view of how delegation affects initiative from the agent.

While we focus primarily on difference of opinion, we augment the model later in the paper to allow the adviser to also differ from the DM in preferences over decisions.

The full paper is available for download here.

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