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Cheap talk with prior-biased inferences

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  • Lee, Yong-Ju
  • Lim, Wooyoung
  • Zhao, Chen

Abstract

We investigate how prior-biased inferences change players' strategic incentives and result in novel welfare implications in the canonical framework of strategic information transmission. The ex ante social welfare achieved in our model exceeds the upper bound characterized in the standard environment without prior bias. The welfare gain stems from the fact that the receiver's prior bias weakens the link between the sender's message and the receiver's response without contaminating the actual content of the messages. We further show that direct communication is optimal among all possible communication protocols in the presence of a sufficient degree of prior bias.

Suggested Citation

  • Lee, Yong-Ju & Lim, Wooyoung & Zhao, Chen, 2023. "Cheap talk with prior-biased inferences," Games and Economic Behavior, Elsevier, vol. 138(C), pages 254-280.
    • Handle: RePEc:eee:gamebe:v:138:y:2023:i:c:p:254-280
    DOI: 10.1016/j.geb.2022.12.009
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    Cited by:

    1. J. Aislinn Bohren & Daniel N. Hauser, 2023. "Behavioral Foundations of Model Misspecification," PIER Working Paper Archive 23-007, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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    More about this item

    Keywords

    Communication; Information transmission; Cheap talk; Prior bias; Non-Bayesian updating;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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