(UBS Pensions series 25) The Wrong Kind of Transparency

In a model of career concerns for experts, when is a principal hurt from observing more information about her agent? This paper introduces a distinction between information on the consequence of the agent's action and information directly on the agent's action. When the latter kind of information is available, the agent faces an incentive to disregard useful private signals and act according to how an able agent is expected to act a priori. This conformist behavior hurts the principal in two ways: the decision made by the agent is less likely to be the right one (discipline) and ex post it is more difficult to evaluate the agent's ability (sorting). The paper identifies a necessary and sufficient condition on the agent signal structure under which the principal bene.ts from committing not to observe the agent's action. The paper also shows the existence of strategic complementarities between information on action and information on consequence. The results on the distinction between action and consequence are then used to interpret existing disclosure policies in delegated portfolio management. In particular, they are consistent with hitherto puzzling evidence that mutual funds systematically overperform pension funds.