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Cheap Talk With Endogenous Conflict of Interest

In a cheap-talk setting where the conflict of interest between sender and receiver is determined endogenously by the choice of parameters θi for each agent i, conditions are provided that determine the sign of each agent’s inverse demand for θ without assuming that the most informative equilibrium will necessarily be played in the cheap talk game. For two popular functional forms of payoffs, we derive analytically tractable approximations for agent i’s demand for θ. In an application where the θi’s are purchased on a competitive market, we provide conditions for a competitive equilibrium to feature maximal information transmission. In a principal-agent application where the agent’s θ is set by the principal, our results show that information transmission will be partial. We consider extensions where: (1) the θ’s are acquired covertly rather than overtly; and (2) the θ’s are traded after the sender has received the information.