Managerial Economics of Cheap Talk
Università Ca' Foscari Venezia - Department of Management
Nanyang Technological University (NTU)
November 1, 2013
Department of Management, Università Ca' Foscari Venezia Working Paper No. 2013/24
Consider an uninformed decision maker (DM) who communicates with a partially informed speaker (S) through cheap talk. DM can choose a project to implement or the outside option of no project. We show that if the agents’ ex-ante rankings over projects do not coincide, then this conflict of interest can reduce S’s incentive to pander and hence facilitate information transmission. Intuitively, S’s ex-ante bias and the incentive to pander affect S’s information revelation in opposite directions and hence offset each other. We also explore the relationship between information transmission and managerial issues such as delegation, disclosure, and interpersonal authority.
Number of Pages in PDF File: 52
Keywords: Cheap Talk, Delegation, Disclosure, Interpersonal Authority, Pandering
JEL Classification: D82, D83, M10
Date posted: November 10, 2013
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