Cheap Talk, Status Quo and Delegation

Abstract:     
The paper analyzes a communication game between a decision-maker and a reputationally concerned expert drawn from a population of informed and uninformed experts. It departs from the literature [e.g. (Ottaviani and Sorensen(2006), Scharfstein and Stein (1990)] by considering the possibility that some of the decision-maker's actions may not reveal the true state of the world. This is shown to change the equilibria of cheap talk games significantly. Experts' strategies get intertwined with the decision-maker's action choice even if these actions have no payoff implications for experts. This leads to different types of equilibria for decision-makers with different payoff functions. Among other things, it opens up the possibility of strategic delegation of the game by one decision-maker to another. It is shown that such delegation allows the original decision-maker to achieve the maximum possible payoff sustainable in a cheap talk equilibrium.

Number of Pages in PDF File: 20

Keywords: Cheap talk games, delegation, status quo, reputation, median voter theorem

JEL Classification: C70, D82, D71, D72

working papers series