Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2024

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Signaling Good Faith

Andrew McClellan, Daniel Rappoport*

Building: Rotman School of Management
Room: Room 1065
Last modified: 2024-05-02

Abstract


A decision maker (DM), who will take a binary decision, cares about his reputation for being "good", i.e., wanting to accord his action choice with public evidence, as opposed to being "bad", i.e., having a fixed partisan agenda regardless of the evidence. While the decision is taken after evidence is realized, the DM has the option to take a "stand" beforehand, i.e., to communicate his intentions via a cheap-talk message. A wide range of equilibria exist and are characterized by how much the good DM reveals about his standards at this initial communication stage. The most informative of these is ex-ante signaling which sees the DM effectively commit to a contingent plan as a function of the realized evidence. Our main theorem states that ex-ante signaling minimizes the probability that the  DM follows his partisan agenda across all equilibria. We also consider how the design of the investigation---the distribution of evidence---affects outcomes in the presence of communication prior to its realization. The investigation mitigates the DM's partisan behavior more when the distribution of evidence is "unpredictable" as this hinders the DM in targeting his announced contingent plan.

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