We incorporate semiotics into economic theory, modeling communication with an encoding-decoding step where the sender transmits a message that the receiver can understand if and only if a common natural language is used. We add an inferential step where the receiver may either believe the literal meaning or disregard it in updating priors. This prevents conflating encrypted and ordinary messages, eliminating informative equilibria where language is used arbitrarily. Unlike cheap and costly talk models, informative equilibria exist only if the senders’ payoffs improve relative to the uninformative equilibrium. In informative equilibria, natural language works as an equilibrium selection mechanism.
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|Date of revision:||Mar 2014|
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