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Professional Advice: The Theory of Reputational Cheap Talk

Author

Listed:
  • 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.

Suggested Citation

  • Marco Ottaviani & Peter Norman Sorensen, 2002. "Professional Advice: The Theory of Reputational Cheap Talk," Discussion Papers 02-05, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0205
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/2002/0205.pdf/
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    References listed on IDEAS

    as
    1. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "The strategy of professional forecasting," Journal of Financial Economics, Elsevier, vol. 81(2), pages 441-466, August.
    2. Marco Battaglini, 2002. "Multiple Referrals and Multidimensional Cheap Talk," Econometrica, Econometric Society, vol. 70(4), pages 1379-1401, July.
    3. Seidmann, Daniel J., 1990. "Effective cheap talk with conflicting interests," Journal of Economic Theory, Elsevier, vol. 50(2), pages 445-458, April.
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    Cited by:

    1. Levy, Gilat, 2004. "Anti-herding and strategic consultation," European Economic Review, Elsevier, vol. 48(3), pages 503-525, June.
    2. Houy, Nicolas & Ménager, Lucie, 2008. "Communication, consensus and order. Who wants to speak first?," Journal of Economic Theory, Elsevier, vol. 143(1), pages 140-152, November.
    3. repec:dau:papers:123456789/15245 is not listed on IDEAS

    More about this item

    Keywords

    reputation; cheap talk; advice; herding;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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