A Theory of Advocates: Trading Advice for In‡fluence

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 influence the planner's decision. Each time she repeats the problem, however, the planner learns about the accuracy of the advocate's recommendation, mitigating some of the advocate's 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 advocate's advice will be ignored and when it will influence a planner's decision, when planners will prefer the advice of an advocate to the advice of a neutral adviser and, finally, how an advocate gains influence 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 financial services give financial advisors who benefit from their business such great latitude in managing their investments and finances.