Cheap Talk Model Research Articles

Communication in the shadow of catastrophe

We perform distributional comparative statics in a cheap talk model of adaptation. Receiver borne adaptation costs drive a wedge between the objectives of sender and receiver that is increasing in the magnitude of adaptation. We allow for infinite supports with infinite disagreement at the extremes and compare communication to unconstrained delegation. We study increases in risk that arise from transformations of the state variable. We find that linear transformations (implying increases in variance) decrease communication and delegation payoffs but do not change their ranking. By contrast, increasing, convex transformations (implying increases in tail risk) decrease the communication payoff relative to the delegation payoff. Our finding extends to the comparison of distributions with thin versus heavy tails.

Simple Mediation in a Cheap-Talk Game

In the Crawford–Sobel (uniform, quadratic utility) cheap-talk model, we consider a simple mediation scheme (a communication device) in which the informed agent reports one of the N possible elements of a partition to the mediator and then the mediator suggests one of the N actions to the uninformed decision-maker according to the probability distribution of the device. We show that no such simple mediated equilibrium can improve upon the unmediated N-partition Crawford–Sobel equilibrium when the preference divergence parameter (bias) is small.

Is cheap talk just empty words? The signalling value of voluntary promises for loan repayment

ABSTRACT When a loan applicant voluntarily makes a repayment promise, is it a valuable signal of his/her future repayment behaviour? Cheap talk models have demonstrated the informativeness of promises. We use a unique dataset from a direct lender in China to show that such cheap talk is informative: among new borrowers, those making voluntary promises are more likely to repay than those making no promises, whereas among returning borrowers, those making voluntary promises have a higher likelihood of default than those making no promises.

Two-sided strategic information transmission

We investigate a cheap talk model in which a decision maker and an expert are both privately informed. Both players observe independent signals that jointly determine ideal actions for the players, and the decision maker can send a cheap talk message to the expert, which is followed by the cheap talk of the expert and then the action of the decision maker. In equilibrium, the strategy of the decision maker is not monotonic, and the revelation of the decision maker concerning her information does not necessarily result in welfare improvement of the players. In particular, in models in which optimal actions are additively and/or multiplicatively separable in the information of two players and their preferences are represented by quadratic loss functions, the information revelation of the decision maker cannot facilitate information transmitted from the expert.

Cheap talk with private signal structures

The paper considers a cheap-talk model in which the receiver privately selects the signal structure of the initially uninformed sender. After the sender privately observes a signal generated by the signal structure, the players play a standard cheap-talk game. We show that by randomizing between two perfectly informative signal structures, the receiver can elicit perfect information from the sender for the bias in preferences of any magnitude, including the case when the bias is the sender's private information. We provide the precise and simple characterization of pairs of such signal structures. The key idea is that they play a dual role: shaping the sender's posterior beliefs and the receiver's reaction to the sender's messages. These factors complement each other and jointly serve as the counterbalancing force that eliminates the sender's incentives to misreport information.

Sourcing from a Self-Reporting Supplier: Strategic Communication of Social Responsibility in a Supply Chain

Problem definition: To manage supplier social responsibility (SR), some firms have adopted a self-assessment strategy whereby they ask suppliers to self-report SR capabilities. Self-reported information is difficult to verify, and this leads to an important credibility question: can a buyer expect truthful reporting? We examine whether a supplier’s SR capability can be credibly communicated through free and unverifiable self-reporting. Academic/practical relevance: SR is a strategic focus for firms because consumers care about ethical production. Some firms rely on supplier self-assessment as part of their SR strategy. It is important to understand the value and challenges of this approach. Methodology: We develop a cheap talk model of a supplier and a buyer. The supplier is endowed with a given SR level (privately known to the supplier) that represents the probability of no violation. The buyer sells in a market that is sensitive to publicized SR violations. The supplier first communicates its SR level to the buyer, and then the buyer chooses between two audit stringency levels to conduct on the supplier and also chooses how much to order. Results: Influential truthful communication may emerge in equilibrium if (i) the buyer orders a larger quantity from the high-type supplier but imposes a more stringent audit than the buyer would for the low type and (ii) the high-type supplier opts for this larger order, whereas the low-type, fearing audit failure, does not. The buyer can benefit as the audit becomes more expensive. Managerial implications: Supplier SR self-assessments can be a valuable strategy for buyers but only if the buyer has access to auditing capabilities of different levels and does not precommit to a particular level. It is valuable for firms to engage in an up-front auditing step to ensure a minimum SR capability of approved suppliers because very low-performing suppliers never truthfully report. Implementing supplier self-assessments may or may not help reduce the social damage resulting from potential SR violations; we identify situations when it helps and when it does not.

Kompromat Can Align Incentives but Ruin Reputations

AbstractPolitical leaders face many agency problems, such as managing subordinates who may not honestly report information. One potential solution to these problems is kompromat: the threat to release compromising information. Using a cheap talk model, we demonstrate how kompromat can improve communication, making both principal and agent better off. However, using kompromat to solve an agency problem generates two costs. First, its mere existence means it may leak inadvertently. Second, because kompromat works by threatening the reputation of subordinates, common knowledge that an organization uses kompromat might be costly even if it is never leaked. These possibilities may foreclose all communication from a subordinate who would have provided truthful information in the absence of kompromat.

Credibility and backlash

Recent politics has been characterized by politicians' harsh anti-immigration appeals and backlash against immigrants. I present a novel explanation for this backlash that hinges on politicians' ability to make such appeals credible. The starting point is a cheap talk model in which a politician (sender) is aligned with one of two opposed groups (receivers) and seeks to communicate her preferences to win support. Importantly, an increase in the weaker group's capacity may enable credible communication by the opposed type of politician, ironically making the weaker group worse-off. Illustrating the model, I discuss how Donald Trump credibly communicated alignment with anti-immigration groups in 2016 through harsh messaging against immigrants, whose power was increasing. More broadly, the model and case show how the behavior of strategic actors can underpin realignments, with shifts in relative group power proving crucial in enabling politicians to assemble novel political coalitions.

Receiver’s sensitivity and strategic information transmission in multi-sender cheap talk

This study examines how a CEO’s sensitivity affects information transmission from multiple unit managers when they communicate strategically during decision-making for technology investment. We develop a simple cheap talk model comprising one CEO and K unit managers, wherein the CEO makes a decision to maximize the units’ profit after the managers reveal their preference for the decision through cheap talk. We demonstrate that the expected total profit improves when sensitivity to the opinion of a manager whose expected preference is moderate among all managers increases. The driving force of the results is termed as alignment effect; increasing sensitivity to a moderate opinion decreases the difference between the expected CEO’s decision and the managers’ ideals. Furthermore, some implications on the decision-making process in technology investment within firms are discussed.

Leaks and Takeovers

I present a cheap talk model of information leaks in takeovers. Takeover targets strategically leak information about the value of synergies to attract an additional bidder. Targets with high synergies leak exaggerated information, cause a runup, and are sold in an auction. Targets with low synergies do not leak and are sold to a single acquirer. Traditional takeover defenses backfire, by increasing the likelihood that the target is sold to a single acquirer, while toeholds increase the acquirer's revenue by discouraging leaks. More stringent enforcement reduces the likelihood of leaks, reduces runups, and increases efficiency in the takeover market.

Stock Market Rumors and Credibility

Abstract Stock prices occasionally move in response to unverified rumors. I propose a cheap talk model in which a rumormonger’s incentives to tell the truth depend on the interaction between her investment horizon and the information acquisition decisions of message-receiving investors. The model’s key prediction is that short investment horizons can facilitate credible information sharing between investors, thereby accelerating the information capitalization into market prices. Analyzing a data set of takeover rumors covered by U.S. newspapers, I find suggestive evidence in support of this prediction. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Vagueness of Language: Indeterminacy under Two-Dimensional State-Uncertainty

AbstractWe studyindeterminacy of indicative meanings(disagreements about meanings of messages among players), a kind of language vagueness examined in Blume and Board (2013. “Language Barriers.”Econometrica81 (2): 781–812). They, using a cheap talk model in which the state-distribution and the players’ language competence were ex-ante uncertain, demonstrated that this vagueness occurs as an equilibrium language. We expand the work of Blume and Board by using a model between an uninformed decision maker and an informed agent in which the state-distribution and the state are both ex-ante uncertain. We show that this two-dimensional uncertainty also leads to indeterminacy of indicative meanings, that is, to a set of conditions in which an agent with different perceptions of the state-distribution intentionally uses the same symbol for the different extents of information on the state. The vagueness, contrary to common expectations, can actually lead to welfare improvement.

Receiver's Sensitivity and Strategic Information Transmission in Multi-sender Cheap Talk

This study examines how sensitivity, which is defined as the degree to which a decision maker (DM) incorporates experts' opinions into his/her own decision-making, affects the precision of communication with experts when communication is strategic. We develop a simple cheap talk model comprising one DM and K experts, whose preference over the DM's decision is their private information. We demonstrate that the precision of communication with one expert monotonously increases in sensitivity to his/her opinion. We also demonstrate that the cross effect of sensitivity to one expert's opinion on the precision of communication with the other expert is not necessarily negative and is dependent on the heterogeneity in type distributions of all experts and the sensitivities to all experts' opinions. Finally, we demonstrate that the DM's expected payoff is improved by the DM's commitment toward being more sensitive to the opinion of the expert whose preference is expected to be moderate among the experts and that it is more likely to be beneficial when the other experts are expected to be greatly divided on what decision should be made.

Cheap talk when the receiver has uncertain information sources

In this paper we analyze a cheap-talk model with a partially informed receiver. In clear contrast to the previous literature, we find that there is a case where the receiver’s prior knowledge enhances the amount of information conveyed via cheap talk. The point of departure is our explicit focus on the “dual role” of the sender’s message in our context: When the receiver’s prior belief is subject to higher-order uncertainty, the sender’s message provides information not only about the true state but also about the reliability of the receiver’s private information. Building on this result, we argue that whether information acquisition and communication are complements or substitutes depends crucially on the extent of uncertainty regarding the information source.

When words are not enough

Communication through ordinary talk is very common. Often, the receiver of information has the option to investigate a sender’s type. We extend a standard cheap-talk model by giving the receiver this option. We show that when the receiver bears most of the investigation cost, the option to investigate drives away most cheap-talk communication. When the sender pays a substantial part of the investigation cost, the option to investigate disciplines the sender. Introducing an investigation device to a cheap-talk model demonstrates the vulnerability of cheap talk on the one hand, and shows how communication can be improved on the other.

The Issuance and Informativeness of Management Long-Term Earnings Growth Forecasts

SYNOPSISThis study examines quantitative long-term earnings growth (LTG) forecasts issued by publicly traded firms. While the difficulty of verifying management LTG forecasts provides incentives for self-serving disclosures, we find that stakeholder interests and forecast credibility considerations significantly constrain such tendencies. In particular, we find that demand from market participants, information asymmetry, peer LTG forecast provision, product market competition, and industry profitability drive management LTG forecast issuance, while poor performance and high uncertainty over firm growth prospects deter management LTG forecast issuance. Moreover, we provide evidence that management LTG forecasts, on average, provide incremental information about future earnings growth, and that high competition and investor monitoring increase LTG forecast informativeness, consistent with predictions of theoretical cheap talk models. Our findings also indicate that both upward and downward LTG guidance provide incremental information about future earnings growth, and that analysts revise their LTG forecasts in the direction of LTG guidance. Overall, our study contributes to the voluntary disclosure literature by providing evidence that suggests elements of a firm's disclosure environment significantly influence the issuance and informativeness of difficult-to-verify disclosures.JEL Classifications: C23; D81; D82; M41.

Need to Know? On Information Systems in Firms

In the context of firm decision-making, several motives for acquiring and conveying information exist. Information serves to make better decisions, to persuade, and to impress. In this paper, we study how these motives shape incentives to acquire and communicate information. We employ a cheap-talk model with information acquisition and communication by a firm's executive. The executive wants to accurately inform an internal decision-maker regarding the value of an opportunity, but has an incentive to overstate this value to persuade or impress external parties. We show that information acquisition and communication interact. The executive's impression and persuasion motives yield limited distortions in communication, if any. Instead, they reduce information acquisition. Furthermore, we find that for firms, transparent communication is a necessary evil. Transparency allows for influential communication to external parties, but constrains internal communication. Theoretically, we contribute by showing that the forward induction refinement excludes babbling as an equilibrium outcome if non-babbling equilibria exist.

Cheap talk with an exit option: a model of exit and voice

The paper presents a formal model of the exit and voice framework proposed by Hirschman (Exit, voice, and loyalty: responses to decline in firms, organizations, and states. Harvard University Press, Cambridge, 1970). More specifically, we modify Crawford and Sobel’s (Econometrica 50(6):1431–1451, 1982) cheap talk model such that the sender of a cheap talk message has an exit option. We demonstrate that the presence of the exit option may increase the informativeness of cheap talk and improve welfare if the exit option is relatively attractive to the sender and relatively unattractive to the receiver. Moreover, it is verified that perfect information transmission can be approximated in the limit. The results suggest that the exit reinforces the voice in that the credibility of exit increases the informativeness of the voice.

Multistage Information Transmission with Voluntary Monetary Transfer

We analyze a cheap talk model in which an informed sender and an uninformed receiver engage in finite-period communication before the receiver chooses a project. During the communication phase, in each period, the sender sends a cheap talk message and the receiver voluntarily pays money for the message she receives. Our results show that combining multistage information transmission with the receiver's voluntary payments can improve welfare. Moreover, we find an upper bound of the receiver's equilibrium payoff and provide a sufficient condition for it to be approximated by the receiver's equilibrium payoff. This result shows that multistage information transmission with voluntary monetary transfer can be more beneficial for the receiver than a wide class of other communication protocols (e.g., mediation and arbitration).

Coordination-free equilibria in cheap talk games

This paper characterizes generic equilibrium play in a multi-sender version of Crawford and Sobel's (1982) cheap talk model, when robustness to a broad class of beliefs about noise in the senders' observation of the state is required. Just like in the one-sender model, information transmission is partial, equilibria have an interval form, and they can be computed through a generalized version of Crawford and Sobel's forward solution procedure. Fixing the senders' biases, full revelation is not achievable even as the state space becomes large. Intuitive welfare predictions, such as the desirability of consulting senders with small and opposite biases, follow.