Truthful Communication and Exclusive Information Clubs

TL;DR

This paper analyzes how strategic misreporting influences the formation of communication networks, showing that truthful communication occurs within cliques and that stable networks are often assortative by signal precision.

Contribution

It introduces a model of endogenous network formation with truthful communication, highlighting the role of clique structures and the impact of heterogeneous signal precisions.

Findings

Clique components support truthful communication.

Stable networks are assortative by signal precision.

High-precision agents concentrated in one club may be socially inefficient.

Abstract

This paper studies how the possibility of strategic misreporting shapes endogenous communication networks. Agents observe noisy private signals about a common state, form costly communication links, exchange private messages with their neighbors, and then choose actions. Payoffs reward both accuracy and coordination with linked agents. A link is valuable because it gives access to information, but it is useful only if the induced local information structure makes truthful transmission incentive compatible. We show that clique components support truthful communication: within a clique, all members observe the same profile of local signals, choose the same posterior action, and therefore have no incentive to distort reports. With heterogeneous signal precisions and convex linking costs, the core selects assortative information clubs ordered by signal precision. These stable truthful networks need not be socially efficient. Because the informational value of precision is decreasing, concentrating high-precision agents in the same club may be privately stable but socially dominated by more mixed partitions.