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An Optimal Signaling Equilibrium

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  • Vladimir Karamychev

    (Erasmus University Rotterdam)

  • Bauke Visser

    (Erasmus University Rotterdam)

Abstract

This paper analyses the optimal combination of costly and costless messages that a Sender uses in a signaling game if he is able to choose among all equilibrium communication strategies. We provide a complete characterization of the equilibrium that maximizes the Sender's ex ante expected utility in case of uniformly distributed types and quadratic loss functions. First, the Sender often wants to avoid money burning by using the most informative cheap talk communication strategy. Second, if he does burn money, he avoids separation and only re-arranges the existing intervals of the most informative cheap talk equilibrium, possibly adding one extra interval. Money burning takes place in the second interval only.

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File URL: http://papers.tinbergen.nl/11148.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-148/1.

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Date of creation: 14 Oct 2011
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Handle: RePEc:dgr:uvatin:20110148

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Web page: http://www.tinbergen.nl

Related research

Keywords: Cheap talk; money burning; optimal equilibrium;

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References

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  1. David Austen-Smith & Jeffrey S. Banks, 1998. "Cheap Talk and Burned Money," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1245, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Vladimir Karamychev & Bauke Visser, 2011. "An Optimal Signaling Equilibrium," Tinbergen Institute Discussion Papers 11-148/1, Tinbergen Institute.
  3. Jerry R. Green & Nancy L. Stokey, 1980. "A Two-Person Game of Information Transmission," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 418, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
  5. Thomas de Haan & Theo Offerman & Randolph Sloof, 2011. "Money talks? An Experimental Investigation of Cheap Talk and Burned Money," Tinbergen Institute Discussion Papers 11-069/1, Tinbergen Institute.
  6. Kartik, Navin, 2007. "A note on cheap talk and burned money," Journal of Economic Theory, Elsevier, vol. 136(1), pages 749-758, September.
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Cited by:
  1. Vladimir Karamychev & Bauke Visser, 2011. "An Optimal Signaling Equilibrium," Tinbergen Institute Discussion Papers 11-148/1, Tinbergen Institute.

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