Conflict of Interest in Third-Party Reviews: An Experimental Study

Abstract

This paper experimentally examines a conflict of interest (COI) situation in which a third-party reviewer provides a product assessment for a firm but also potentially benefits economically from the assessed firm’s rival. We present a behavioral economics model to examine how reviewer competition and reciprocal relationships between firms and reviewers affect decision outcomes, followed by an experiment to investigate the model predictions. The experimental results are consistent with the behavioral model predictions. In particular, we empirically document a COI problem where the third-party reviewer’s report is biased, and consequently, the assessed firm underinvests in product quality. We find that this adverse result is driven by reciprocity between the third-party reviewer and the assessed firm’s rival. When we introduce an additional reviewer such that there is competition among the third-party reviewers, reporting biases are alleviated, and firms raise product quality levels. Interestingly, however, when informal agreements exist between the third-party reviewer and the assessed firm’s rival, reviewer competition exacerbates biases even more compared with the case without competition, further undermining the assessed firm’s incentive to invest in product quality. This paper was accepted by Eric Anderson, marketing.