An Optimal Signaling Equilibrium

Tinbergen Institute Discussion Paper 2011-148/1

50 Pages Posted: 14 Oct 2011

See all articles by Vladimir A. Karamychev

Vladimir A. Karamychev

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Bauke Visser

Erasmus University Rotterdam - Department of Economics; Tinbergen Institute Rotterdam (TIR)

Date Written: October 14, 2011

Abstract

This paper analyses the optimal combination of costly and costless messages that a Sender uses in a signaling game if he is able to choose among all equilibrium communication strategies. We provide a complete characterization of the equilibrium that maximizes the Sender's ex ante expected utility in case of uniformly distributed types and quadratic loss functions. First, the Sender often wants to avoid money burning by using the most informative cheap talk communication strategy. Second, if he does burn money, he avoids separation and only re-arranges the existing intervals of the most informative cheap talk equilibrium, possibly adding one extra interval. Money burning takes place in the second interval only.

Keywords: Cheap talk, money burning, optimal equilibrium

JEL Classification: C7, D8

Suggested Citation

Karamychev, Vladimir A. and Visser, Bauke, An Optimal Signaling Equilibrium (October 14, 2011). Tinbergen Institute Discussion Paper 2011-148/1, Available at SSRN: https://ssrn.com/abstract=1944037 or http://dx.doi.org/10.2139/ssrn.1944037

Vladimir A. Karamychev (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Bauke Visser

Erasmus University Rotterdam - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+ 31 (0)10 40 81449 (81441) (Phone)
+ 31 (0)10 40 89149 (Fax)

Tinbergen Institute Rotterdam (TIR)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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