Serie Documentos de Trabajo UCEMA No. 443 (Revised September 2013)
41 Pages Posted: 4 Mar 2011 Last revised: 13 Sep 2013
Date Written: February 2011
Natural language is a shared social convention that allows hearers to understand speakers. We model this using two steps. First, an encoding-decoding step where the sender transmits verbal information to the receiver. Second, an inferential step where the receiver may either believe the literal meaning of the message or disregard it in updating priors. These epistemic steps sharply restrict the beliefs that may be entertained on and off the equilibrium path. When there are credible messages, natural language is a powerful means to select equilibria.
Keywords: cheap talk, signs, linguistic symbols, literal meaning, equilibrium meaning
JEL Classification: D83, C72
Suggested Citation: Suggested Citation