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Strategic Information TransmissionAuthor(s): Vincent P. Crawford and Joel SobelSource:
Econometrica,
Vol. 50, No. 6 (Nov., 1982), pp. 1431-1451Published by: The Econometric SocietyStable URL:
http://www.jstor.org/stable/1913390
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Econometrica,Vol.50,No.6 (November, 1982)
STRATEGIC INFORMATION TRANSMISSION
BY VINCENTP. CRAWFORD AND JOELSOBELI"Oh, what a tangled web weweave, when first we practicetodeceive!"-SirWalterScottThispaper develops a model ofstrategic communication, in which abetter-informedSender(S)sendsapossibly noisy signaltoaReceiver(R),who then takes an action thatdetermines thewelfareofboth. Wecharacterize the set of Bayesian Nashequilibria understandardassumptions,and showthatequilibrium signaling always takes astrikingly simpleform, inwhich S partitions the support ofthe (scalar) variable thatrepresents his privateinformationand introduces noise into hissignal by reporting, in effect, onlywhich elementof thepartitionhis observationactuallylies in. We showunder furtherassumptionsthatbeforeSobserves his private information, theequilibrium whose partitionhas the greatestnumber of elements isPareto-superiorto all otherequilibria,and that ifagentscoordinateonthisequilibrium,R'sequilibrium expectedutilityrises whenagents' preferencesbecomemoresimilar. Since R bases his choice ofactiononrational expectations, this establishes asenseinwhichequilibrium signalingismore informative when agents'preferencesare moresimilar.1.INTRODUCTIONMANY OF THEDIFFICULTIESASSOCIATED
with reachingagreements are informa-tional.Bargainers typically havedifferent information about preferences andeven aboutwhatisfeasible.Sharinginformationmakes available betterpotentialagreements,but italso hasstrategiceffects that makeonesuspectthatrevealingall to anopponentis notusuallythe mostadvantageous policy.Nevertheless,itseems clear that evenacompletely self-interestedagentwillfrequentlyfind itadvantageous to reveal some information. Howmuch,and howtheamountisrelated tothe similarity of agents'interests, arethesubjects ofthis paper.While ourprimarymotivations stem from thetheoryofbargaining,we havefoundituseful toapproach these questionsinamoreabstractsetting,whichallowsustoidentifythe essentialprerequisitesfor thesolutionwepropose.Thereare twoagents,oneof whom hasprivateinformation relevant to both.Thebetter-informedagent, henceforth calledtheSender(S),sends apossibly noisy
'We aregratefultoFranklinFisher, RogerGordon, Bengt Holmstr6m, DavidKreps, RogerMyerson, JeanTirole, anonymous referees,andparticipantsinseminar presentations at BellLabs,TheUniversityofCalifornia(Berkeley, Irvine,and SanDiego), Caltech,Cambridge, CERAS, CORE,Leeds, LSE,Princeton,TelAviv, UBC,the AUTEmeetings,theSanDiegoSummerMeetingsof theEconometricSociety,anda Stanford IMSSSworkshopforhelpfulcomments. We owespecialthanksto Co-Editor JamesMirrlees,who made numeroushelpful expositorycriticisms of earlierdrafts,insistedthat a resultalongthe lines of Theorem 2 was available(andthat weproveit),andsuggestedthemethodofproof.Crawford's workwassupportedinpart byNSFgrantSES79-05550.Sobel'swork waspartially supported bythe SSRC while he was at NuffieldCollege,Oxford,in connectionwith theproject, "Incentives,ConsumerUncertainty,and PublicPolicy."1431
 
1432V. P. CRAWFORD AND J.SOBEL
signal, based on his private information, to the other agent,henceforthcalledtheReceiver(R).Rthenmakesa decisionthat affects the welfare ofboth,based onthe informationcontainedin thesignal.Inequilibrium,the decision rulesthatdescribe how agents choosetheiractionsin thesituationsinwhichthey findthemselves are best responsesto eachother.The model anditsrelationshiptothe literatureare describedinSection2.Underassumptions akin to those commonly maintained in the signalinglit-erature, equilibrium is characterized in Section 3 in a strikingly simple way.Although S'schoice ofsignalingruleisnotrestricted apriori,inequilibriumhepartitionsthesupportoftheprobabilitydistributionof the variable thatrepre-sentshisprivateinformationand,ineffect,introducesnoise into hissignal byreporting onlywhichelementof thepartitionhisobservation actuallylies in. Thisrepresents S's optimal compromise between including enoughinformationin thesignaltoinduceRtorespondto it andholdingbackenoughsothat hisresponseis as favorable aspossible.There are,ingeneral,severalessentiallydifferentequilibria,but wearguein Sections4and 5 that the one whosepartitionhas thegreatestnumberofelementsisa reasonable oneforagentsto coordinateon,becauseitis bothsalient and,beforeSobserves hisprivate information, Pareto-superiortoallotherequilibria.Given thisselection,we showunder stronger assumptions that,ina sense mademorepreciseinSections4and5,the more similaragents'preferences,the moreinformative the equilibrium signal.Section6 concludes thepaperwitha briefsummaryandsuggestionsforfurther study.Our resultshave,inaddition to their intrinsicinterest, important implicationsfor thedesignofmodels thatrelate thequalityofbargaining outcomes to thebargaining environment.Inparticular, the rationalist explanations of the occur-renceof bargaining impasses,and of therelationshipoftheir frequency to thebargaining environment,withwhich we arefamiliar (see Chatterjee and Samuel-son[1], Crawford [2], and Sobel and Takahashi [14], for example) all rest onagents havingdifferentinformation,either aboutpreferencesorabouttheextentto whichtheyhavesucceededincommitting themselvesto theirdemands. Thesemodels all abstract from thepossibilitythatagents may findituseful tocommunicateother thanbytheirdemands. Ourmodel shedssomelight on whenthis is an innocuoussimplification,and when it islikelyto distort the conclu-sions.Our model is alsopotentially applicabletomanyothersituationswherestrategiccommunication is apossibility. Example applicationsinclude businesspartnerships, doctor-patientandlawyer-client relationships,andoligopoly (seeNovshek andSonnenschein [12]). Finally,it canbeviewed asa principal-agentmodel,withStheagentandRtheprincipal.As willbecome clearinSection2,however,wedepartfrom theprincipal-agent literature by treating the principaland theagent strategically symmetrically,in contrast to theusual treatment oftheprincipalas aStackelbergleader.
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