Sunday, May 15, 2011

Ignorance is the Best Disinfectant

Kevin Drum points to Boston Globe story casting doubt on whether disclosure of conflicts-of-interest is a useful check against abuses.

Basically, researchers ran a study where one set of people was asked to make an appraisal (say, the value of a house), and another was designated experts to assist them in their appraisal. When the experts were given a conflict of interest (being paid more based on how high the appraisers valued the house), they gave inferior advice. Big surprise. But when the experts were forced to disclose their conflict, they gave even worse advice. And, the appraisers were more likely to listen to the conflicted-experts, because they didn't want to seem untrusting after the appraiser disclosed their conflict. So massive failure all around.

This reminds me of a similar story regarding a law mandating transparency in corporate executive compensation. It was passed during one of those scandals over how ridiculous corporate salaries were, and the idea was "we'll shame them into bringing their compensation practices down to earth." Well, all that happened was now all the companies knew what their competitors were paying, and all the companies below the median immediately hiked their salaries to match the market. And those above median? Well, they thought they were just rewarding good work, and wanted to maintain their edge at attracting talent -- so they jacked up their compensation too. Yay, bidding war!

No comments: