The Managerial Economics of Cheap Talk (with K. Leong)

Abstract: This paper studies the impact of conflicts of interest on cheap talk communication with an outside option when a decision maker incurs a cost of an action, and a speaker's information is noisy. In our model, the players may agree or disagree on the ex-ante ranking over projects, and the decision maker may select to not carry out any project. When their ex-ante rankings coincide, the speaker is more tempted to lie and hide bad news about both players' ex-ante most preferred project because the decision maker is highly likely to carry it out. Unlike in the standard cheap talk model (without an outside option), conflicts of interest can facilitate communication. This paper also explores interesting managerial issues such as the comparison between delegation and communication, disclosure of the speaker's interest, and the choice between interpersonal authority and persuasion.