Economic Theory Seminar Series: Rational Communication with Transfers

Anton Kolotilin | UNSW

We enrich a cheap-talk game between an informed sender and an uninformed receiver by adding repeated interactions and voluntary transfer payments. Transfers play two roles here: they motivate the receiver's decision-making and signal the sender's information. Although full separation can always be supported in equilibrium, partial or complete pooling is optimal if preferences are sufficiently divergent. In this case, extreme information is optimally pooled to discipline the receiver's decision-making by reducing her reneging temptation. As an extension, we consider a partially-informed receiver. As the receiver becomes more informed, welfare strictly decreases because self-enforcing agreements become harder to sustain.