Producing and Manipulating Information: Private Information Providers versus Public Information Providers

textabstractTo reduce the chances of policy failures, policy makers need information about the effects of policies. Sometimes, policy makers can rely on agents who already possess the information. Often, the information does not exist yet. This raises two questions. First, how much resources should be devoted to the production of information? Second, should information be produced by a profit- maximizing firm (a private consultant) or by someone who has an interest in policy outcomes (a political adviser)? This paper shows that policy makers may prefer hiring a political adviser for two reasons. First, in contrast to a private consultant, a political adviser need not be fully compensated for exerting effort. Second, a political adviser with moderate preferences produces information of a higher expected quality than a private consultant is induced to do by the optimal monetary incentive scheme. The cost of hiring a political adviser is that she may distort policy decisions by manipulating information. As long as a political adviser is not too biassed, the policy maker prefers consulting a political adviser to consulting a private consultant, even if a political adviser and a private consultant are equally costly. Competition among political advisers is shown to reduce the willingness of political advisers to produce information