Clarifying by Discretizing
16 Pages Posted: 24 Apr 2017 Last revised: 28 Jun 2017
Date Written: June 27, 2017
Cheap talk often occurs in the form of discrete messages, such as Yelp ratings, film reviews, student grades, and debt ratings. In the classic Crawford and Sobel (1982) model, coarse messaging is always possible in equilibrium, but is not maximally informative if the sender's and receiver's interests coincide. In the situations listed above, however, the sender's and receiver's interests likely do coincide and the message functions appear to be deliberately chosen to optimally serve the sender's and receiver's interests. We provide a simple model in which signals are received with some exogenous noise and show that the optimal message function is often discrete: while discrete messages are less precise, they are easier to interpret. The noise structure determines whether messaging should be discrete and, if so, how coarse the optimal message function should be.
Keywords: Cheap Talk, Discrete, Coarse, Yelp, Credit Ratings, Stock Analysts
JEL Classification: D83, G00, M00
Suggested Citation: Suggested Citation