Working Paper: NBER ID: w23273
Authors: Raphael Boleslavsky; Bruce I. Carlin; Christopher Cotton
Abstract: When self-interested agents compete for scarce resources, they often exaggerate the promise of their activities. As such, principals must consider both the quality of each opportunity and each agent’s credibility. We show that principals are better off with less transparency because they gain access to better investments. This is due to a complementarity between the agents’ effort provision and their ability to exaggerate. As such, it is suboptimal for principals to \nprevent misreporting, even if doing so is costless. This helps explain why exaggeration is ubiquitous during allocation decisions: money management, analyst coverage, private equity fundraising, and venture capital investments.
Keywords: Financial Reporting; Investment Quality; Transparency; Exaggeration
JEL Codes: D43; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Less transparency (L15) | Better investment quality (G31) |
| Agents' reporting behaviors (L85) | Decision-maker's decisions (D79) |
| Less transparency (L15) | Higher investment incentives for agents (G24) |
| Higher investment incentives for agents (G24) | Better investment quality (G31) |
| Less monitoring (Y50) | Better overall outcomes for decision-maker (D91) |