Information design in cheap talk

Abstract

Abstract An uninformed sender publicly commits to an informative experiment about an uncertain state, privately observes its outcome, and sends a cheap talk message to a receiver. We provide an algorithm valid for arbitrary state-dependent preferences that will determine the sender’s optimal experiment and his equilibrium payoff under a binary state space. We provide conditions for informative information transmission to occur or to fail. These conditions depend more on marginal incentives—how payoffs vary with the state—than on the alignment of the sender’s and the receiver’s rankings over actions within a state. The algorithm can be easily modified to study the canonical cheap talk game with a perfectly informed sender.