Optimal Relevance in Imperfect Information Games

Abstract

To help incorporate natural language into economic theory, this paper does two things. First, the paper extends to imperfect information games an equilibrium concept developed for incomplete information games, so natural language can be formalized as a vehicle to convey information about actions as well as types. This equilibrium concept is specific to language games, because information is conveyed by the sender through the message’s literal meaning. Second, the paper proposes an equilibrium refinement which selects the sender’s most preferred equilibrium. The refinement captures the notion that the speaker seeks to improve its status quo, aiming at optimal relevance. Explicit coordination through verbal communication parallels the idea of implicit coordination through focal points.

Keywords: cheap talk, signs, semantics, pragmatics, relevance, equilibrium selection

JEL Classification: D83, C72