Seminar fredag den 7. februar 2014

Can You Keep a Secret? - Building Reciprocal Trust in Communication

Abstract

This paper analyzes strategic information transmission in a repeated model of communication. The sender learns about the possible bias of the receiver by observing her chosen actions. Decisions differ in their importance for the two players across periods. If the receiver's stakes in the first period are low, the biased type invests in reputation by mimicking the action of the unbiased type. I characterize the most informative communication equilibrium under two alternative scenarios; one in which the stakes are players' private information, and another in which they are commonly known. Although knowledge of the stakes is beneficial for the sorting of the receiver in the first period, it is shown to reduce all players' welfare for a wide range of parameters.

JEL Classification: C73, D72, D82, D83

Keywords: Cheap talk, Two-sided incomplete information, Reputation

Contact: Marcus Asplund