Working Paper: CEPR ID: DP9201
Authors: Mikhail Drugov; Marta Troya Martinez
Abstract: This paper analyzes the incentives of a seller to provide (un)biased and (im)precise advice about a complex product such as insurance, banking and telecommunication services. Misleading the buyers by biasing the advice upwards increases the revenues but also the expected fine imposed by the authority. Making the advice less precise does not affect the revenues in equilibrium but interferes with the authority's inference and affects the expected fine in a non-monotonic way. In particular, making the advice less precise makes it harder to convict the seller but increases the expected fine when the seller is found guilty. We find that, in the equilibrium, biasing the advice and making it noisier are complements; in particular, a higher buyers' heterogeneity, a stricter standard of proof employed by the authority and a larger share of credulous consumers make the advice more biased and less precise.
Keywords: Advice; Consumer Protection; Legal Procedure; Persuasion
JEL Codes: D18; D8; K4; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing the bias in advice (D91) | increased seller revenues (D49) |
| increasing the bias in advice (D91) | increased expected fine from authorities (G18) |
| making advice less precise (C60) | complicates authority's ability to convict sellers (K42) |
| making advice less precise (C60) | non-monotonic effect on expected fines (K49) |
| biasing the advice and increasing its noise (D80) | complementary actions (D10) |
| higher buyer heterogeneity (D11) | greater bias in seller advice (G41) |
| stricter standards of proof (K13) | greater bias in seller advice (G41) |
| larger share of credulous consumers (D16) | greater bias in seller advice (G41) |