Cheap Talk With Endogenous Conflict of Interest
Econometrica · 2020 · Volume 88 · Issue 6
Abstract
In a cheap-talk setting where the conflict of interest between sender and receiver is determined endogenously by the choice of parametersθifor each agenti, conditions are provided that determine the sign of each agent's inverse demand forθwithout assuming that the most informative equilibrium will necessarily be played in the cheap talk game. For two popular functional forms of payoffs, we derive analytically tractable approximations for agenti's demand forθ. In an application where theθi's are purchased on a competitive market, we provide conditions for a competitive equilibrium to feature maximal information transmission. In a principal–agent application where the agent'sθis set by the principal, our results show that information transmission will be partial. We consider extensions where: (1) theθ's are acquired covertly rather than overtly and (2) theθ's are tradedafterthe sender has received the information.
Keywords
Cheap talk, endogenous bias
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