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A Theory of Advocates: Trading Advice for In‡uence

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  • Ralph Boleslavsky

    ()
    (Department of Economics, University of Miami)

  • Tracy R. Lewis
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    Abstract

    An advocate for a special interest provides information to an uninformed planner for her to consider in making a sequence of important decisions. Although the advocate may have valuable information for the planner, it is is also known that the advocate is biased and will distort her advice if necessary to ináuence the plannerís decision. Each time she repeats the problem, however, the planner learns about the accuracy of the advocateís recommendation, mitigating some of the advocateís incentive to act in a self-serving manner. We propose a theory of advocacy to explain why planners do sometimes rely on information provided by advocates in making decisions. The interaction takes place in two stages, a cheap talk recommendation from the advocate, followed by decisions and learning by the planner. The theory predicts conditions under which an advocateís advice will be ignored and when it will ináuence a plannerís decision, when planners will prefer the advice of an advocate to the advice of a neutral adviser and, Önally, how an advocate gains ináuence with a decision maker by making his preferences for action unpredictable. Applications of our theory are used to explain why regulated enterprises are sometimes delegated authority to determine how they are monitored and why some consumers of Önancial services give Önancial advisors who beneÖt from their business such great latitude in managing their investments and Önances.

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    File URL: http://www.bus.miami.edu/_assets/files/faculty-and-research/academic-departments/eco/eco-working-papers/2010/wp-2010-17-Theory-of-advocates.pdf
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    Bibliographic Info

    Paper provided by University of Miami, Department of Economics in its series Working Papers with number 2010-17.

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    Length: 53 pages
    Date of creation: Aug 2010
    Date of revision:
    Publication status: Forthcoming: Working Paper
    Handle: RePEc:mia:wpaper:2010-17

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    Related research

    Keywords: Advocates; Advocacy; Learning; Cheap Talk; Dynamic Contract;

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    References

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    1. Roman Inderst & Marco Ottaviani, 2009. "Misselling through Agents," American Economic Review, American Economic Association, vol. 99(3), pages 883-908, June.
    2. Okuno-Fujiwara, Masahiro & Postlewaite, Andrew & Suzumura, Kotaro, 1990. "Strategic Information Revelation," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 25-47, January.
    3. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-34, December.
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