Regulation with Interested Experts
Abstract: This article constructs a sequential game theoretic model in which regulation is based on expert reports regarding a state of the world --- such as the social benefits from regulation – that is known to the expert but not observed by a decision maker. Experts are assumed to have policy preferences over regulation. When the expert’s preference is known but experts incur a positive cost to report to the regulator (or court), it is shown that there is a unique sequential equilibrium in which a pro-regulation expert falsely reports that regulatory benefits are high with a higher probability, the larger are ex ante regulatory benefits; in cases where a net benefit maximizing regulator is close to being ex ante indifferent between regulating or not, the pro-regulation expert is most truthful (in the sense of reporting honestly with a high probability). Two remedies for expert bias are considered: imperfect auditing by the regulatory decision-maker, and expert competition. It is shown that imperfect auditing increases the reliability of expert advice, and the more imperfect the audit, the more reliable is the expert advice. Expert competition between experts with conflicting preferences likewise always increases the information available to the decision-maker, although at least one expert will generally have to be compensated to provide advice against her interest. The result is generalized to the case where expert preferences are known only to the expert and where the expert must incur a positive cost to become perfectly informed with some positive probability. In this case, expert effort to become informed is maximized by the expert who is just indifferent between regulating and not ex ante. For this reason, the optimal expert from the point of view of the decision maker generally has preferences that lie between those of the decision maker and those which maximize expert effort.
