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Cheap Talk with an Informed Receiver

  • Junichiro Ishida
  • Takashi Shimizu

This paper examines the effectiveness of cheap talk when the receiver is imperfectly informed. We show that the receiver's prior knowledge becomes an impediment to efficient communication in a model with the discrete state space: in general, the more the receiver is informed, the less information she can extract from the sender. In fact, when the receiver is as informed as the sender, no information can be conveyed via cheap talk for an arbitrarily small preference bias. This draws sharp contrast to the conventional setup where there is always a fully separating equilibrium as long as the preference bias is sufficiently small. We relate this result to issues that are critical for organizational design, such as the allocation of decision-making authority and the span of control.

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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0746.

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Date of creation: Jun 2009
Date of revision:
Handle: RePEc:dpr:wpaper:0746
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  1. 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..
  2. Navin Kartik, 2008. "Strategic Communication with Lying Costs," 2008 Meeting Papers 350, Society for Economic Dynamics.
  3. Wouter Dessein, 2000. "Authority and Communication in Organizations," Econometric Society World Congress 2000 Contributed Papers 1747, Econometric Society.
  4. Battaglini Marco, 2004. "Policy Advice with Imperfectly Informed Experts," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 4(1), pages 1-34, April.
  5. Marco Ottaviani & Peter Sorensen, 1999. "Professional Advice," Game Theory and Information 9906003, EconWPA.
  6. Marco Ottaviani & Peter Norman Sørensen, 2006. "Reputational cheap talk," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 155-175, 03.
  7. Olszewski, Wojciech, 2004. "Informal communication," Journal of Economic Theory, Elsevier, vol. 117(2), pages 180-200, August.
  8. Matthews, Steven A. & Postlewaite, Andrew, 1989. "Pre-play communication in two-person sealed-bid double auctions," Journal of Economic Theory, Elsevier, vol. 48(1), pages 238-263, June.
  9. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap talk can matter in bargaining," Journal of Economic Theory, Elsevier, vol. 48(1), pages 221-237, June.
  10. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  11. repec:rje:randje:v:37:y:2006:1:p:155-175 is not listed on IDEAS
  12. Marco Battaglini, 2000. "Multiple Referrals and Multidimensional Cheap Talk," Econometric Society World Congress 2000 Contributed Papers 1557, Econometric Society.
  13. Kartik, Navin & Ottaviani, Marco & Squintani, Francesco, 2007. "Credulity, lies, and costly talk," Journal of Economic Theory, Elsevier, vol. 134(1), pages 93-116, May.
  14. Matthews, Steven A, 1989. "Veto Threats: Rhetoric in a Bargaining Game," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 347-69, May.
  15. Gerardi, Dino & McLean, Richard & Postlewaite, Andrew, 2009. "Aggregation of expert opinions," Games and Economic Behavior, Elsevier, vol. 65(2), pages 339-371, March.
  16. Austen-Smith David, 1993. "Interested Experts and Policy Advice: Multiple Referrals under Open Rule," Games and Economic Behavior, Elsevier, vol. 5(1), pages 3-43, January.
  17. Doraszelski Ulrich & Gerardi Dino & Squintani Francesco, 2003. "Communication and Voting with Double-Sided Information," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-41, August.
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