Optimism and Communication

Abstract

I examine how the communication incentive of an agent (sender) changes when the prior of the principal (receiver) about the agent's private information becomes more optimistic (in the sense of monotone likelihood ratio dominance). I use the canonical model of strategic communication (Crawford and Sobel, 1982) under the assumption that the agent has an upward bias. The main result is that under a more optimistic prior, more information can be transmitted in equilibrium in the sense that the principal's expected payoff is higher. Applying the result to three models, I find: (1) If the principal can choose among intermediaries to make decisions, she may benefit from choosing someone more optimistic than herself, but never benefits from choosing someone more pessimistic. (2) A more optimistic principal is more likely to gain from centralization relative to delegation. (3) In a game of two-way communication in which a privately informed principal reports to an agent first, the principal cannot credibly reveal her private signal unless it is informative enough.