The Gatekeeping Expert's Dilemma

TL;DR

This paper explores how gatekeeping experts can strategically communicate to influence agents effectively without being exploited, using financial auditing as a primary example.

Contribution

It introduces the concept of strategic vagueness as a solution for gatekeepers to guide behavior while minimizing manipulation opportunities.

Findings

Strategic vagueness helps gatekeepers balance influence and manipulation risk.

Greater independence or expertise can sometimes reduce communication effectiveness.

Theoretical insights explain why auditors often accept clients' reports without extensive verification.

Abstract

This paper studies how experts with veto power -- gatekeeping experts -- influence agents through communication. Their expertise informs agents' decisions, while veto power provides discipline. Gatekeepers face a dilemma: transparent communication can invite gaming, while opacity wastes expertise. How can gatekeeping experts guide behavior without being gamed? Many economic settings feature this tradeoff, including bank stress tests, environmental regulations, and financial auditing. Using financial auditing as the primary setting, I show that strategic vagueness resolves this dilemma: by revealing just enough to prevent the manager from inflating the report, the auditor guides the manager while minimizing opportunities for manipulation. This theoretical lens provides a novel rationale for why auditors predominantly accept clients' financial reports. Comparative statics reveal that greater gatekeeper independence or expertise sometimes dampens communication. This paper offers insights into why gatekeepers who lack direct control can still be effective.