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Information Acquisition and Credibility in Cheap Talk

Sinem Hidir

CRETA Online Discussion Paper Series from Centre for Research in Economic Theory and its Applications CRETA

Abstract: This paper explores the interaction between uncertain bias and endogeneous information acquisition in strategic communication. I consider an expert who is privately informed about his bias as well as about whether he is informed, in addition can also engage in costly information acquisition. In this setup, information acquisition simultaneously serves the purposes of getting informed and increasing credibility before communicating through cheap talk to a decision maker. I define the signaling and the intrinsic value of information and find the conditions under which a separating equilibrium can arise, which is the most informative as well as the welfare maximizing equilibrium. I solve for equilibria as a function of cost of information acquisition and show that communication is most precise with an initially uninformed expert at an intermediary cost value. The overall welfare is non-monotone in cost, and it increases when cost increases to enable separation. When covert information acquisition is considered, there is a tradeoff between less wasteful investment versus less communication precision compared to the overt case.

Keywords: information acquisition; cheap talk; communication; signaling; credibility JEL classification numbers: D82; D83 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-mic
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