Clarifying by Discretizing

16 Pages Posted: 24 Apr 2017 Last revised: 28 Jun 2017

Jordan Martel

University of Colorado at Boulder, Leeds School of Business, Department of Finance, Students

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance

Robert Alan Van Wesep

Independent

Date Written: June 27, 2017

Abstract

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

Martel, Jordan and Van Wesep, Edward Dickersin and Van Wesep, Robert Alan, Clarifying by Discretizing (June 27, 2017). Available at SSRN: https://ssrn.com/abstract=2950813

Jordan Martel

University of Colorado at Boulder, Leeds School of Business, Department of Finance, Students ( email )

Campus Box 419
Boulder, CO
United States

Edward Dickersin Van Wesep (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Robert Alan Van Wesep

Independent ( email )

No Address Available

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