We introduce a tractable model of cheap talk among players located on networks. In our model, a player can send a message to another player if and only if he is linked to him. We derive a sharp equilibrium and welfare characterization which reveals two basic insights. In equilibrium, the willingness of a player to communicate with a neighbor decreases with the number of opponents who communicate with the neighbor. The ex-ante equilibrium welfare of every player increases not only with the number of truthful reports transmitted in the network, but also when truthful reports are more evenly distributed across players. We apply our findings to the analysis of homophily in communities, to organization design, and to the study of endogenous network formation. Communication across communities decreases as communities become larger, and communication may be asymmetric: From large communities to small ones. In our set up, fully decentralized organizations maximize all players’ welfare. Further, decentralized networks, where information may flow asymmetrically, endogenously form in equilibrium. Finally, we introduce the possibility of public communication in networks, and identify conditions under which public communication Pareto dominates private communication.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number
668.