Costly Transparency ∗

We consider whether a career-minded expert would make better decisions if the principal could observe the consequences of the expert’s action. The previous literature has found that this “transparency of consequence” can only improve the efficacy of the expert’s decision making. We show, however, that this conclusion is very sensitive to the specified cost structure. While learning the consequences of the expert’s action makes the expert more likely to choose the action most likely to correspond to the true state of the world, when costs are asymmetric, this may be associated with a decrease in the principal’s expected welfare. In addition, for a range of parameters, if the principal benefits from learning the consequences of the expert’s action, her utility is higher if she observes only the consequences and not the action taken. As such, the optimal transparency regime will involve either the principal observing only the expert’s action or only the consequences of the expert’s action; it will but never be optimal to observe both. We illustrate these results with examples from finance and public policymaking.