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The Gatekeeping Expert's Dilemma

Shunsuke Matsuno

TL;DR

This paper develops a formal model of gatekeeping experts who influence agents through veto power and communication, focusing on financial auditing. It shows that precise disclosure invites gaming, while strategic vagueness—structured as a partition of the signal space—can steer managers toward reports closer to the auditor’s preferred standard without revealing its exact value. The analysis introduces the maximal acceptance property and the no-gambling constraint, derives auditor-optimal partitions (including uniform partitions in specific cases), and uses GPFE refinements to justify auditor behavior. Comparative statics reveal counterintuitive effects of auditor independence and transaction complexity on information transmission, with broad implications for regulation and other gatekeeping contexts such as bank stress tests and environmental permits. Overall, the work provides a unified theory of how vague, truthful communication can achieve effective gatekeeping without succumbing to manipulation, contributing to the literature on auditing, veto bargaining, and reputation-driven regulatory design.

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.

The Gatekeeping Expert's Dilemma

TL;DR

This paper develops a formal model of gatekeeping experts who influence agents through veto power and communication, focusing on financial auditing. It shows that precise disclosure invites gaming, while strategic vagueness—structured as a partition of the signal space—can steer managers toward reports closer to the auditor’s preferred standard without revealing its exact value. The analysis introduces the maximal acceptance property and the no-gambling constraint, derives auditor-optimal partitions (including uniform partitions in specific cases), and uses GPFE refinements to justify auditor behavior. Comparative statics reveal counterintuitive effects of auditor independence and transaction complexity on information transmission, with broad implications for regulation and other gatekeeping contexts such as bank stress tests and environmental permits. Overall, the work provides a unified theory of how vague, truthful communication can achieve effective gatekeeping without succumbing to manipulation, contributing to the literature on auditing, veto bargaining, and reputation-driven regulatory design.

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.

Paper Structure

This paper contains 41 sections, 14 theorems, 42 equations, 4 figures.

Table of Contents

  1. Introduction
  2. Related Literature
  3. An Example
  4. Precise Communication
  5. Vague Communication
  6. A Model of a Gatekeeping Expert
  7. Setup
  8. Payoffs
  9. The Auditor's Payoff
  10. The Manager's Payoff
  11. Communication
  12. Strategies, Timeline, and Equilibrium Concept
  13. The Reporting Problem with the Gatekeeper
  14. Timeline
  15. Equilibrium Concept
  16. ...and 26 more sections

Key Result

Lemma 4.1

For any $[a,b]\subset[\underline{X},\overline{X}]$, eq:reporting-problem admits a unique solution $r^* \ge a + \pi^R$.

Figures (4)

  • Figure 2.1: Vague Communication via Partition
  • Figure 4.1: Acceptance Probability
  • Figure 7.1: Comparative Statics: Uniform vs. Non-Uniform Partition
  • Figure 7.2: Comparative Statics: Normal Distribution

Theorems & Definitions (23)

  • Definition 3.1
  • Lemma 4.1
  • Example 1: Uniform Distribution
  • Proposition 5.1
  • Example 2: The Normal Distribution
  • Lemma 6.1: Maximal Acceptance Lemma
  • Lemma 6.2
  • Theorem 6.1
  • Example 3: Uniform Partition ($X\sim\mathcal{U}{[1,9]}$ and $\pi^R=1$)
  • Example 4: Non-Uniform Partition
  • ...and 13 more