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Information Acquisition and Credibility in Cheap Talk

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  • Hidir, Sinem

    (University of Warwick)

Abstract

This paper explores the interaction between uncertain bias and endogeneous information acquisition in strategic communication. I consider an expert who is privately informed about his bias as well as about whether he is informed, in addition can also engage in costly information acquisition. In this setup, information acquisition simultaneously serves the purposes of getting informed and increasing credibility before communicating through cheap talk to a decision maker. I define the signaling and the intrinsic value of information and find the conditions under which a separating equilibrium can arise, which is the most informative as well as the welfare maximizing equilibrium. I solve for equilibria as a function of cost of information acquisition and show that communication is most precise with an initially uninformed expert at an intermediary cost value. The overall welfare is non-monotone in cost, and it increases when cost increases to enable separation. When covert information acquisition is considered, there is a tradeoff between less wasteful investment versus less communication precision compared to the overt case.

Suggested Citation

  • Hidir, Sinem, 2017. "Information Acquisition and Credibility in Cheap Talk," CRETA Online Discussion Paper Series 36, Centre for Research in Economic Theory and its Applications CRETA.
  • Handle: RePEc:wrk:wcreta:36
    as

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    File URL: https://warwick.ac.uk/fac/soc/economics/research/centres/creta/papers/manage/36_-_creta_hidir.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    information acquisition ; cheap talk ; communication ; signaling; credibility JEL classification numbers: D82 ; D83;

    JEL classification:

    • 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

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