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Professional Advice: The Theory of Reputational Cheap Talk

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Author Info

  • Marco Ottaviani

    (London Business School)

  • Peter Norman Sorensen

    (Institute of Economics, University of Copenhagen)

Abstract

Professional experts offer advice with the objective of appearing well informed. Their ability is evaluated on the basis of the advice given and of the realized state of the world. This situation is modeled as a reputational cheap-talk game in which the expert receives a signal of continuously varying intensity with ability-dependent precision about a continuum of states. Despite allowing an arbitrarily rich message space, at most two messages are sent in equilibrium. The expert can only credibly transmit the direction but not the intensity of the information possessed. Equilibrium advice is then systematically less informative than under truthtelling.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 02-05.

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Length: 43 pages
Date of creation: Jul 2002
Date of revision:
Handle: RePEc:kud:kuiedp:0205

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Keywords: reputation; cheap talk; advice; herding;

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References

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  1. Marco Ottaviani & Peter Norman Sørensen, 2004. "The Strategy of Professional Forecasting," FRU Working Papers 2004/05, University of Copenhagen. Department of Economics. Finance Research Unit.
  2. Vijay Krishna & John Morgan, 1999. "A Model of Expertise," Working Papers 154, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  3. Ottaviani, Marco & Sorensen, Peter, 2001. "Information aggregation in debate: who should speak first?," Journal of Public Economics, Elsevier, vol. 81(3), pages 393-421, September.
  4. Marco Battaglini, 2002. "Multiple Referrals and Multidimensional Cheap Talk," Econometrica, Econometric Society, vol. 70(4), pages 1379-1401, July.
  5. Ewerhart, Christian & Schmitz, Patrick W., 2000. ""Yes Men," Integrity, and the Optimal Design of Incentive Contracts," MPRA Paper 12534, University Library of Munich, Germany.
  6. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  7. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
  8. Gul, Faruk & Lundholm, Russell, 1995. "Endogenous Timing and the Clustering of Agents' Decisions," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1039-66, October.
  9. Peter Sorensen & Marco Ottaviani, 2000. "Herd Behavior and Investment: Comment," American Economic Review, American Economic Association, vol. 90(3), pages 695-704, June.
  10. Effinger, Matthias R. & Polborn, Mattias K., 2001. "Herding and anti-herding: A model of reputational differentiation," European Economic Review, Elsevier, vol. 45(3), pages 385-403, March.
  11. Ehrbeck, Tilman & Waldmann, Robert, 1996. "Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 21-40, February.
  12. Dewatripont, Mathias & Jewitt, Ian & Tirole, Jean, 1999. "The Economics of Career Concerns, Part I: Comparing Information Structures," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 183-98, January.
  13. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-34, December.
  14. Marco Ottaviani & Andrea Prat, 2001. "The Value of Public Information in Monopoly," Econometrica, Econometric Society, vol. 69(6), pages 1673-1683, November.
  15. Seidmann, Daniel J., 1990. "Effective cheap talk with conflicting interests," Journal of Economic Theory, Elsevier, vol. 50(2), pages 445-458, April.
  16. Avery, Christopher N. & Chevalier, Judith A., 1999. "Herding over the career," Economics Letters, Elsevier, vol. 63(3), pages 327-333, June.
  17. Paul Heidhues & Johan Lagerlöf, 2000. "Hiding Information in Electoral Competition," CIG Working Papers FS IV 00-06, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Feb 2002.
  18. Smith, L. & Sorensen, P., 1996. "Pathological Outcomes of Observational Learning," Economics Papers 115, Economics Group, Nuffield College, University of Oxford.
  19. Owen Lamont, 1995. "Macroeconomics Forecasts and Microeconomic Forecasters," NBER Working Papers 5284, National Bureau of Economic Research, Inc.
  20. Zitzewitz, Eric, 2001. "Measuring Herding and Exaggeration by Equity Analysts and Other Opinion Sellers," Research Papers 1802, Stanford University, Graduate School of Business.
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Citations

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Cited by:
  1. repec:hal:cesptp:halshs-00194365 is not listed on IDEAS
  2. Nicolas Houy & Lucie Ménager, 2005. "Communication, consensus and order. Who wants to speak first ?," Cahiers de la Maison des Sciences Economiques v05030, Université Panthéon-Sorbonne (Paris 1), revised Jan 2006.
  3. Levy, Gilat, 2004. "Anti-herding and strategic consultation," European Economic Review, Elsevier, vol. 48(3), pages 503-525, June.

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