On communication frictions

Abstract

Communication is an activity that is crucial in many economic contexts. Whenever there is any asymmetry of information between two parties, there might arise a need to exchange information. Common as it is, communication is also complex and inherently imperfect. Information revelation may be mitigated by both language constraints and strategic incentives. I describe such difficulties in communication in two exemplary setups. In ”Delegation as a signal: implicit communication with full cooperation” I examine a principal– agent model with fully aligned incentives to examine how inexpressible information can be implicitly communicated through observable choices. I assume there is two-sided private information; the principal knows his preference parameter, while the agent observes the decision-relevant state of the world. The principal may obtain a costly and imperfect signal about the state and either choose one of two possible actions or delegate the authority to the perfectly informed agent. The decision to delegate is more than just indecisiveness. In particular, an altruistic agent that observes delegation and the actual state realization can correctly anticipate the direction of the principal’s ”bias” in preferences and adjust the decision to better suit the principal’s needs. This phenomenon is a result of explicit correlation of truthful signals about the state of the world and implicit correlation of the signal and the type that arises in the equilibrium. Chapter ”When competence hurts: revelation of complex information” examines a sender– receiver persuasion game. While the sender’s payoff depends only on the action chosen, the receiver’s payoff is affected by a state of the world, that is observed only by the sender. I assume that understanding the state of the world may require some competence from the receiver. Since noisy messages may be a result of both endogenous strategic obfuscation and exogenous constraints, they do not necessarily indicate ”bad news”. I show that being more competent could be hurtful for the receiver. Since competent receivers are more likely to correctly understand the unfavorable announcement, they would be less wary upon hearing noise. As a result, the seller is able to sustain an equilibrium in which a noisy message is a relatively good signal. With a less competent receiver the unique equilibrium is informative.