Universita Ca' Foscari Venezia, Department of Management
Cheap Talk with Outside Options (with K. Leong)
Abstract: In Crawford and Sobel (1982) (CS), a sender (S) uses cheap talk to persuade a receiver (R) to select an action as profitable to S as possible. This paper shows that the presence of an outside option -- that is, allowing R to avoid taking any action, yielding state-independent reservation utilities to R and S -- has an important qualitative impact on the results. Contrary to CS, in this model, the informativeness of communication is not always decreasing in the level of conflict of interest. With a smaller conflict of interest over actions, S may have a larger incentive to hide information and avoid the outside option, which may result in less information transmission. Relatedly, communication can be more informative than in CS.