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Professional Advice: The Theory of Reputational Cheap Talk

  • Marco Ottaviani

    (London Business School)

  • Peter Norman Sorensen

    (Institute of Economics, University of Copenhagen)

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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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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  17. 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.
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