Cheap Talk with Outside Options

Abstract

In Crawford and Sobel (1982) (CS), a sender (S) uses cheap talk to persuade a receiver (R) to select an action as profitable to S as possible. This paper shows that the presence of an outside option – that is, allowing R to avoid taking any action, yielding state-independent reservation utilities to R and S – has an important qualitative impact on the results. Contrary to CS, in this model, the informativeness of communication is not always decreasing in the level of conflict of interest. Relatedly, communication can be more informative than in CS.

Keywords: Cheap Talk, Information Transmission, Experts

JEL Classification: D82, D83