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Sweet Talk: A Theory of Persuasion

  • Di Maggio, Marco

This paper introduces a model of sweet talk in which a seller may acquire verifiable information and selectively disclose it to a buyer to negotiate a deal. We start by analyzing a model with common priors in which the seller generates information for two reasons: a trading motive and a profit motive that is, to make trade possible or to increase the gains from it. There exists a negotiation region in which the seller continues to reveal information even if trading is already profitable. We extend the model, allowing for different prior beliefs about the value of the object, arguing that a complementarity between the seller's confidence and the precision of his information endogenously arises. Appointing an optimistic salesman may be costly because he may destroy profitable trading opportunities. We also allow the seller to choose in which market to trade: a matching market with a fixed price or a haggling market. Our model also provides a testable difference between a model of trading with homogenous priors and one with heterogeneous priors and finds application in understanding contracts as reference points.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18697.

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Date of creation: 15 Nov 2009
Date of revision:
Handle: RePEc:pra:mprapa:18697
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  1. Van den Steen, Eric, 2005. "Too Motivated?," Working papers 18180, Massachusetts Institute of Technology (MIT), Sloan School of Management.
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  5. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  13. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
  14. Paul Milgrom, 2008. "What the Seller Won't Tell You: Persuasion and Disclosure in Markets," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 115-131, Spring.
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  16. Roland Bénabou, 2008. "Joseph Schumpeter Lecture Ideology," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 321-352, 04-05.
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  20. Abhijit Banerjee & Rohini Somanathan, 2001. "A Simple Model of Voice," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 189-227.
  21. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
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  28. Harrington, Joseph E, Jr, 1993. "Economic Policy, Economic Performance, and Elections," American Economic Review, American Economic Association, vol. 83(1), pages 27-42, March.
  29. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
  30. Kultti, K.K., 1997. "Equivalence of Auctions and Posted Prices," Discussion Paper 1997-57, Tilburg University, Center for Economic Research.
  31. Stephen Morris, 1997. "Risk, uncertainty and hidden information," Theory and Decision, Springer, vol. 42(3), pages 235-269, May.
  32. Roland Bénabou & Jean Tirole, 2006. "Belief in a Just World and Redistributive Politics," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 699-746.
  33. Che, Yeon-Koo & Kartik, Navin, 2006. "Opinion as Incentives," MPRA Paper 6094, University Library of Munich, Germany, revised 15 Nov 2007.
  34. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
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  38. Rubinstein, Ariel & Glazer, Jacob, 2006. "A study in the pragmatics of persuasion: a game theoretical approach," Theoretical Economics, Econometric Society, vol. 1(4), pages 395-410, December.
  39. H.S. Shin, 1994. "News Management and the Value of Firms," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 58-71, Spring.
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