Renegotiation-Proof Cheap Talk

TL;DR

This paper examines the limitations of repeated cheap talk communication between an informed Advisor and an uninformed Decision-Maker, showing that optimal payoffs are not renegotiation-proof and proposing equilibria involving compromises.

Contribution

It introduces the concept that no near-optimal equilibrium in repeated cheap talk is renegotiation-proof, highlighting the necessity of compromises for efficiency.

Findings

Optimal payoffs are not renegotiation-proof.

Pareto efficient equilibria involve compromises.

Truth-telling and strategic exaggeration are both part of equilibrium strategies.

Abstract

An informed Advisor and an uninformed Decision-Maker, with conflicting interests, engage in repeated cheap talk communication in always new decision problems. While the Decision-Maker's optimal payoff is attainable in some subgame-perfect equilibrium, no payoff profile close to the Decision-Maker's optimal one is immune to renegotiation. Pareto efficient renegotiation-proof equilibria entail a compromise between the Advisor and the Decision-Maker. This could involve the Advisor being truthful and the Decision-Maker not fully utilizing this information to their advantage, or the Advisor exaggerating the truth and the Decision-Maker pretending to believe them.