Informal communication

The typical sender-receiver game studied in the literature assumes that the receiver is uninformed. In reality, the receiver usually relates the sender’s message to her own information obtains a signal about their truthfulness. I analyze a sender-receiver model where both agents have private information and the sender cares to be perceived as honest. If the sender’s reputation concerns are strong enough, the model predicts truthful information revelation as a unique equilibrium. This uniqueness result contrasts with the multiplicity of uninformative equilibria in cheap-talk games with an uninformed receiver. I also show that in the unique equilibrium, the sender uses (per se) extraneous information to support his recommendation for the receiver’s action. If the sender also cares about the receiver’s action, he randomizes between telling the truth and lying. Examples show that extraneous information may make communication more as well as less honest. ¤The paper was presented at Caltech, Catholic University of Louvain CORE, LSE, Northwestern, Kellogg MEDS, Princeton, Stanford GSB, University of Chicago, University of Pennsylvania, University of Rochester, University of Wisconsin Madison. I would like to thank the workshop participants of these institutions for remarks. I am especially grateful to Faruk Gul and Wolfgang Pesendorfer for conversations on this and related research, as well as for numerous suggestions and remarks on previous drafts of this paper, and I also greatly appreciate conversations with Avinash Dixit. Financial assistance from the Sloan Foundation Dissertation Fellowship is gratefully acknowledged.