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Cheap Talk with Strategic Substitutability

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  • Venkatesh, Raghul S

    (Department of Economics, University of Warwick)

Abstract

In the classic Crawford-Sobel (CS) model of strategic communication between an informed Sender and uninformed Receiver, perfect information transmission is never achieved as an equilibrium outcome. I present a modified version of the CS cheap talk game with the following two innovations : (i) both players take actions, and (ii) actions are strategic substitutes. In contrast to the CS setup, the modified game can facilitate perfect information revelation. I characterize the conditions under which a full information revelation equilibrium exists. When these conditions are violated, only partial revelation equilibria exist. Under partial revelation, the Sender reveals information up to a threshold state and pools beyond this threshold, resulting in some loss of information. Welfare analysis suggests that partial revelation equilibria with a higher threshold pareto dominate those with lower thresholds. Crucially, a higher threshold equilibrium is also interim efficient – every Sender type at least weakly prefers this over a lower threshold equilibrium.

Suggested Citation

  • Venkatesh, Raghul S, 2017. "Cheap Talk with Strategic Substitutability," CRETA Online Discussion Paper Series 31, Centre for Research in Economic Theory and its Applications CRETA.
    • Handle: RePEc:wrk:wcreta:31
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/centres/creta/papers/manage/31_-_creta_venkatesh.pdf
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    References listed on IDEAS

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