Strategic Transmission of Costly Information David Austen-Smith Econometrica, Vol. 62, No. 4. (Sul., 1994), pp. 955-963, Stable URL hip: flinks.jstor-org/sici sici=0012-9682% 28199407%2962%3A4%3C955%3ASTOCI%3E2.0.CO®3B: Econometrica is currently published by The Econometric Society. Your use of the ISTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at hup:/www,jstororglabout/terms.hml. ISTOR’s Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at hhupulwww.jstor-org/journalsfeconosoc.html. ch copy of any part of'a JSTOR transmission must contain the same copyright notice that appears on the sereen or printed page of such transmission, ISTOR is an independent not-for-profit organization dedicated to creating and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support @ jstor.org. hupulwww jstor.org/ Sat Sep 2:07:10:54 2006Ezonometvca, Vol. 62, No.4 (Sly, 194), 985-963, STRATEGIC TRANSMISSION OF COSTLY INFORMATION By Davip Ausren-Svent ! 1 INTRODUCTION Iris often mie case that an individual's decision is at least partly based on information received from another. And when the agents’ payoffs depend on both the former's decision and on the latter's information, there is an incentive for the informed individual to attempt to bias the decision maker's decision in his or her favor by strategically manipulating the information transmitted. Ina seminal paper, Crawford and Sobel (1982) (hereafter, C/S) study such strategic information transmission in the context of an abstract sender /receiver game. Variants of the Crawford and Sobel model have been applied widely, and as the application varies so often does the interpretation of “type.” In some cases, “type” refers to a preference parameter given by Nature—as, for example, in bargaining theory (c.g. Farrell and Gibbons (1989), Matthews (1989), whereas in other settings—for instance, legislative decision making or expert testimony — “type” refers to more or less technical information concerning how decisions map into final consequences and, as such, is acquired information (e.., Gilligan and Krehbiel (1987), Milgrom and Roberts (1986)). When the information has to be acquired, itis natural to suppose the acquisition is costly; for otherwise, there is no reason why such information is asymmetrically distributed. So long as the receiver can observe surely—or, at least, accurately infer—whether the sender is informed, and so long as messages are cheap-talk, there is no issue here for strategic information transmission (save whether 10 become informed at all). However, there are many circumstances when itis inappropri- ate to assume the receiver has such knowledge. ‘One possibility is that a receiver may know that a sender has some relevant informa- tion, but be uncertain of the quality of this information. A second, perhaps more important, possibility is that a receiver is unable to tell whether a (potential) sender is uninformed. Inter alia, this problem constitutes the rationale for “ignorance of the law” being inadmissible as a legal defense (were it admissible, then “informed” miscreants ‘would mimic “uninformed” transgressors); leads voters to be skeptical of politicians claiming ignorance of illegal arms deals; and makes the SEC sensitive to problems in Gistinguishing insider trading from legitimate good judgement. So there is an intrinsic asymmetry in that it is generally possible for, say, senders to verily possession of at least some information, but it is typically prohibitively difficult to verify any lack of knowledge (ee Okuno-Fujiwara, Postlewaite, and Suzumura (1990) for more on this issue. This paper examines some implications of the verifiabilty problem inherent in «demonstrating ignorance for the canonic C/S model. The main result is that informative signaling is possible for a wider range of parameter values than is possible when the receiver is sure the sender is informed. The intuition is as follows. Under the verfiabilty constraint, “low” sender types can pool with the uninformed “type,” leaving the receiver unsure as to whether the message is sent by an informed “low” type or an uninformed sender; the receiver’s uncertainty leads to a relatively favorable action for the “low” types as compared to that induced when the receiver knows the sender is a “low” type for sure; and since itis “low” types who have the incentive to mimic the behavior of “high” types, this response enables some “high” types to distinguish themselves more casily than when the receiver is sure the sender is informed. "This paper has benefited ffom the comments of Jeff Banks, Andreas Blume, Tim Feddersen, Raghu Sundaram, and the anonymous referees. All remaining erors are my own. Financial support fom the National Science Foundation is gratefully acknowledged 985956 DAVID AUSTEN-SMETH Sections 2 and 3, respectively, present the model and compute an example to develop some intuition for the principal results, established in Section 4, 2. MODEL There are two agents, a sender (S) and a receiver (R), At some price p €[0,=), the sender can observe the true value of a parameter r€[0,1}=7. The following two assumptions are imposed throughout: (AL) Inronmiarion Assumrrion: (i) p is private information to $; (i) 5s information acquisition decision is itself unobserved by i and (ii) i elects to lear the value of 7, say T=, then tis private information to. (A2) Verity Assumerion: () If Sis informed, then $ is able 1 prove this fact to Rat no cost; but (i) it is impossible for $10 prove to R that S is uninformed. Part (ii) of the Information Assumption (AI) is standard and makes the problem nontrivial, Parts (i) and (i) are novel, and capture the idea that R can be unsure whether Sis informed, Tt is worth anticipating subsequent discussion here to observe that the price at which {is willing to become informed is, in equilibrium, going to depend on the expected payofl difference between being informed and being uninformed. Consequently, if the price of information is common knowledge (Assumption (ALi) fails) then, unless the expected payoff difference is zero the assumption that ’s information acquisition decision is private (Assumption (ALD) is irrelevant; in equilibrium, R will be able to infer the Aecision unequivocally? Similarly, if (ALi) does not obtain, then (AL) is irrelevant. In sum, given data acquisition is endogenous, both (AL) and (ALi are typically necessary to support the possibility that is uncertain in equilibrium about 5's “expertise.” (An alternative model is that Nature chooses whether Sis informed according to a given common knowledge probability, and the realization of Nature's choice is private informa- tion to.) ‘Assume p and ¢ are uncorrelated. Let F(-) denote the differentiable distribution function of p, with density f+) having support (0,2); and let GC) denote the differentiable distribution function of 7, with density ¢(-) having support [0,1]. Both F ‘and G are common knowledge. Save for the existence of a distinguished message, the structure of the model following 5°s data acquisition decision is duc to Crawford and Sobel (1982). Formally, Shas two decisions to make. S's information acquisition strategy is a map, a: [0,) > (0,1) where, for any p > 0, a(p) = 1 means that $ chooses to pay p and observe the true value of rT; and conversely for a(p) = 0. As will become clear later, the restriction to pure strategies here is without loss of generality. ing acquired information oF not, § then sends a message to R. With some abuse of notation, let 2 denote the sender's “type” (no information ) if a(p) = 0. Now define S's As discussed below, individuals’ preferences over actions, conditional on S's information, common knowledge. "TAs the example in Section 3 shows, this assumption on the support of Fis stronger than necessary. tis discussed further in Section 4CCosTLy INFORMATION 957 speaking strategy to be & map o such that (7.2) € [0,2) x {2}, 0( 7,2) Mx (0), Wp.) €[0,%) xT, o( pt) ©M x {0,1} 1M is an arbitrary uncountable sot of messages, and the distinguished component “1 flac to an informed sender captures the Verifabily Assumption (A2). respective of whether a(p) = 1 or a(p) = 0, a sender can transmit a message (m, 0); however, S can send a message (mm, 1) if and only if a(p) = 1 and the sender is informed. Finally, R chooses an action a € R. R's decision strategy is a map, 8: Mx (0,1) oR. Under the assumptions on preferences below, the restriction to pure decision strategies is without loss of generality For any (RX T, R's pyo is gien by UN th R, where (ting subsets denote partial derivatives ag usual) Uf(-)<0, and USC)> 0. Further assume that Wee, a(t) = argmax, 0, a(t) is strictly increasing in ‘The following notation will be useful. For any 0.<¢<1'< 1, write a(t) = arama [UraneaAGe)-GO) Note that, by Uff> 0 and g(3)>0 Ws (01) alts sretly increasing in both ¢ ‘The sender's final payoff from the game depends both on type and on R’s action in a way similar to R’s payoff, and additionally on any information acquisition expenditures. Following Crawford and Sobel, the sender's (quasilinear) preferences are parameterized by a scalar x > 0 describing the extent to which Sand R have similar preferences over Ga,0)-pais. For any (at, 5p) © RX TX (0,2) X{0,*), $°s pay is given by Ua, 4,2) =p if S is informed, ‘and U%a,t,x) otherwise, where Us(-)<0, and UC-)> 0, Assume argmaxyen U%a,f, x) js nite and, with respect 10 the scalar x, assume Tim, UC, x) SO") and USC ,2)> 0 Dunmow: * An equilibrium to the game isa list of strategies (a*,o*,3*) and a belief 1 on [0,1] such that: (Wel, a*(p)=1 onlyit EqUS(5*(o*(D,1)),t,x) p> EgU®(5*(o*( 7,2), 4,4); (2) WEL), 0° p,8)¢ argmax U9(3"((m0)).1.2), and WeT, of(p,te argmax [U9(5"((m,k)) ot x)i(m,k) EM x (0,1)]; (2) Yom) EM (0), 9" (mk) = temas Eo [UA(aNhom bs (c4) pt is derived by Bayes Rule from the priors and (a*,o*), where defined. If the sender is known to be informed ex ante, so (e1) and the first statement of (€2) are vacuous, these conditions define an equilibrium to the game studied by Crawford and “tn the definition and following, FU" and Ec{U'- denote, respective the unconditional and the conditional expected value of U* wth respet tothe dG, et958, DAVID AUSTEN-SMITHL Sobel; hereon, such equilibria are referred to as C/S equilibria. When the sender is not known to be informed ex ante, I shall (somewhat loosely) talk of equilibria “under receiver uncertainty.” ‘Say that an action a © Ris elicited by an equilibrium speaking strategy o if there is a message (m, ) sent under o that induces the receiver to take the action a; i.e 8(m,k)) =a. An equilibrium (a*,07,6%, n°) is influential iff o° elicits at least two ‘actions, It follows from the definition of equilibrium and the assumption that p and 1 are uncorrelated that the sender's speaking strategy can, without loss of generality, be written solely as a function of type, rT or . To sce this, note first that (e3) implies that R's equilibrium action depends only on the message sent; and second, by (€2), 5" ‘equilibrium message depends only on type 7 or ©. Therefore, while in principle ‘messages might be informative with respect to p, they are decision-irelevant for R and 0 leave the extent to which the speaking strategy is influential unaffected (for example, if § is informed and o"(p,1) #0°Cp',t), (€2) and (3) require 6%o*p,1)) = 5°(o*(p',1))). The formal dependency of the sender's speaking strategy on the realiz tion of p'will be suppressed hereafter. Thus an uninformed sender’s message is written o(@)eMx(0}, and an informed sender's (of type #7) message is written o(t) = Mx (0,0), “The main result of the paper is that there exist circumstances under which there is no inuental C/S_equlibrium, but there does exist an influential equllbrium under feceiver uncertainty. Before presenting the claim formally itis tsofl to develop some intuition forthe results, and’ for the character of equilbrium behavior, through an example ‘Given the sender is known sutly to observe the tre value of +, Crawford and Sobel (4989, Lemma 1 and Theorem 1) prove that all C/S equa are essentially pation eaulibria In such eqilina there nite pation {ty = 0, fy,--stq= 1) ofthe pe Space (Oil such that, forall = 0,.--4N=1-and all ypes ¢ (5, 4,2; 0°) =m, and iJ implies m, +m, The partitions are implicitly defined by the incentive compat- tiliy conditions in (2), which require “boundary” types 1, to be indferent between sending the message associated with (¢,_,,/,] and that associated with (1, ¢,.1} specifi- cally, WBA, OCOD) stk) = UBC GadD)sf8)> Their argument applies equally here. Consequenty, an equilibrium is influential if the associated partion fsa least binary partition; Le, > 2 For the example, let both F and G be uniform distributions on (0, 1] and assume that preferences over actions « © R described by @ UN(a,t)s —(t-a), U(a,t,x) Assume the sender is known to be informed. Then given (2) and G uniform, C/S (pp. 1440/4) show that any equilibrium partition satisfying (1) is defined by a difference ‘equation parameterized by ty QB) Wet, Gani +2i(i= Ix, (st t-ay) and 2i(7 ~ 1)x <1. Since an equilibrium is influential iff atleast two actions st value of x (ie, the greatest discrepancy between $’s and R’s tupporting an influential equilibrium is given by setting = 2 and hence £= 1/4, where fp are elicited, the lar preferences), say £ solving 2i(i— Dx =CostLy INFORMATION 959 [Now assume itis not known ex ante whether the sender is informed. In this case, let bbe the largest (strictly, the sup.) value of x supporting an influential equilibrium. It turns out that ¥=1/2>4. To see this, consider a binary partition of T, (0,t,,1), and speaking strategy ot())=0%(@) =m Mx (0) We Oif x< 1/2 and, as predicted by @), 4(1) = (1 ~4x)/2> Oi x.<'1/4° implicitly diferemtiating (8) and collecting terms yields dt(p)/dp <0 Vid.p) € (0.1). There fore, because ¢{(p) and p(t,) are continuous on (0, 1, there exists a solution (p*, 77) © 0,1 ,1) 10 (8) and (9) if x€(1/4,1/2). And since similar computations assuming Te = [ty ll yield x-< 1/4 for f,€ (0,1), ¥= 1/2 as claimed. So there exists an influential equilibrium here in circumstances where there is no such C/S equilibrium; viz. x¢(2,2). The intuition for the result is that under receiver uncertainty, the message mis sent both by the uninformed sender and by informed sender types, 1 7°. In equilibrium, R updates the probability that is informed conditional on hearing m* and chooses a best response accordingly. This best response action lies between what R would choose if R knew for sure that was informed and what R would choose if R knew that $ was uninformed. Therefore, since “low” types elicit a relatively high action under receiver uncertainty, it becomes possible for higher (informed) sender types to signal this fact eredibly when such a signal is impossible under receiver certainty S strictly speaking, (8) and (9) imply, respectively, #1) (C= 43)/2,0) and p(0) = (0,1. How. ever, both 11) =0 and (0) = Late inconsistent with equilibrium behavior960 DAVID AUSTEN-SMITH Notice in the constructed equilibrium that rf <4*(m*) < 1/2; hence an uninformed sender (whose most preferred action is x+1/2) would like to send the message ‘mM x (I). But by the verifiability assumption (A2), such a sender cannot convince the receiver that he is informed, AAs remarked at the start of the previous section, Crawford and Sobel's argument for the partition structure of any C/S equilibrium applies equally here, and equations (1), above, must hold. As in the preceding section, let T* denote the set of informed sender types that pool with the uninformed sender (ie., rT’ such that (0 Mx (0) and let o%(0) ©M x (1) Wee T° ‘When the receiver is certain ex ante that the sender is informed (as in the Crawford and Sobel setting, influential equilibria only occur when at least two subsets of informed sender types send distinct messages; one such message could easily be “Stay home,” mi But when there is ex ante uncertainty, this message (in equilibrium) has an equivocal ‘meaning: with positive probability, m° is being sent by an informed type ¢ © T°, and with the complementary probability itis sent by an uninformed sender. The receiver's best response on seeing m?, therefore, is given by (20) 6(mP) © argmax H(m? )EqlU%(a,7)Ir€ 7°] + [1 —H(m? YJEgU*(a,7), where H(m°) is the receiver's posterior probability that S is informed conditional on secing m?. Specifically, since (in equilibrium) 7 is an interval, say T"=[t,-.¢)), Hn )= F(QXG()~ Gle,_))/G ~ Fal ~ Gi) + GU, )D where q > 0 is such that a(p)= 1 ift p 0. If there exists an influential C/S equilibrium, then there exists an influential equilibrium under receiver uncertainty, Moreover, &-< Proor: Fix x>0 and suppose there exists an influential C/S equilibrium, (1,8). ‘Then by C/S-Theorem 1, there exists an influential equilibrium in which exactly {wo actions are elicited. Let (0, ,1) be the binary partition associated with such an equilib- rium (if there are multiple binary partition equilibria at_x, pick one arbitrarily). So ot) =m Wes; o(t)=n#m We >; 8(m) = a0, 3); and 8n) = as, D. By definition of 4 C/S equilibrium, (1) implies (1) U8(4(0.5).5,2) = UH, 1), 5,2), with 20,89 0 and Uf,>0, (11) implies #< 1. There are then two cases: §> 0 and i = 0. Assume frst that #> 0, For any (s,p)@ 7 (0,2), let (12) 9(6.p) = argmax Als, p)EqlU%(a,t)it <5] + [1-A(s,p)] EoU*(a,t), where H(s, p) = F(p\G(3)/1l ~ F(pX1 ~ G(s). By assumption, Uff <0 and s(0)> 0, all fT; $0 the maximand in the right-hand side of (12) is’ strictly concave in. aCostLy INFORMATION 961 Moreover, Wr € 7, a(t) <>; hence y(s,p) is unique and finite. By assumption, F and G are continuous on T x [0,) and so H(s, p) is continuous in (s, p). So, by the maximum theorem, y(-) is a continuous function. Let PCs) = max f" [UA 1)ot,2) — UUs dota] aC) at, and let P= max, « y P(s). By assumptions on U* and US, 0 < P<. tn particular, (el) implies a(p)= 0'¥p > P, Now construct a map ¢ on = (5, 1}x [0 PD as follows: (3) W(s,p) Ed, E(5,p) = (465.7), #557). where (14) (5,7) = (0 [5, 1S, 9). x) = US(H(S1). 6,2) (13) a(s.p)= ['[U@C.0.1.2) UOC. P)-t)] 80 at 1 claim { is a continuous function mapping A into A. Begin by showing (14) is ‘well-defined, Pick any (5, p)€ 4. Since G(s) > Or > 0 and Fp) <1 ¥p 0, az, is strictly increasing in both its arguments; hence, (19) WET, ¥(5,)=8(0,5) <¥(4,0) 0,1), with strict inequality Ws € (0,1. Further, yp) is decreasing in p for any s €T. To see this let (a, syp) denote the masimand in U2, Since 2a, s,p) ents Was, p)ER xT x10,2) and’ y(s, p) is finite, Z,(y(s, p),s, p) = 0. Substituting for H(s, p) and collecting terms, Z\(9(6, p) sp) = 0 iff 1 LUFOGr) Nel de+ 1 -FLPIL'UFOG.P)-1)8( a= 0. By Ufl <0, Zy(0(s, ps, p) <0 Ws, p) € T X/0,2). So, by the implicit function theo- rem, yp) is' differentiable function, of p, ¥p > 0. In particular, signldy(s, p)/dp] = sigal 2,046, ps, p)} = sanl—(0)/ UNC, p), Dao dtl. By US> 0, (17) implies JLUMG(s,p), Og dt > 0. Therefore, since fp) >0 Vp 0,2), dy(s, p)/dp <0 as claimed, with strict inequality ¥s € (0,1). With (16), this yields (18) Msp) EA, ¥(5,P) €(H(O,5)-8(01)] By a(-,+) strictly increasing in its arguments, s > §>0 and (18) give a(0, 3) aU, 1), (11) implies 9) —_-US(y(5,p), 8x) > U(A(1), 5,4). By x>0 and US> 0, USy(s,p)1,8) < USGS, Dy1,20. So by continuity there exists £1) such that Us, pt, x) = UsCaLs, 1,2; moreover, by Us > 0.1 is unique. Now, by Uf <0, a(s, 1) sa continuous function of & on [3 1). To check that als, 1) a(1) as 571, use L'Hopita’s Rule and the assumption that g(1) > 0 to show tim f'0M(a.r)8(8)de/11 ~G(0)]= UN) ‘Therefore, since y(s,p) is a continuous function, continuity of US yields 7: 4 [5,1] a continuous function. Since y(5, p) 0 implies (5, p)>0 all (,p)€4, and a(s, p)

0 all (s,p) € 4 implies p* > 0. Hence, a0", 1)> ye, p*)> 10,5) and, therefore, 1 > >5 by (id), Us > 0 and Us > 0. Now consider the following strategies: e(p)=1 itt rept; ot) =o%(@)= mM EMK{O) Weeets and o*(1) =n eEMx (I) Wor: B*(mP)=y(e,p")s and 8*(n) =a(e",1). Let the receiver have any out-of-equilibrium beliefs such that: (i) Wom,0)# m°, .5((m,0)) = 8°(m®}; and (i) Wom, 1) # n, 6((m, 1) = (6¥(m°),5%(n)). Then, by construc- tion, the specified strategies constitute influential equilibrium behavior in the game under receiver uncertainty. This proves the existence claim for $> 0. Suppose $=0. Then (11) holds at $=0 with a(0,5)= a(0) 0, (18) implies a(e, 1)> a(0,1) > y(e, p) > a(0,e) ¥p €[0, Pl. Re place # by e in (13), (14), and (15), and extend the map £'to the domain [e, 1] (0, Pl. For suficiently small e>0, (11) and continuity of U* imply USCxe, p),e, x) > UMale,),€,1) ¥p €[0, P]. Therefore the preceding arguments can be repeated to show there exists @ fixed point (',p), 1>1°>e and p'>0; and the proof of existence is complete. To show >, note that the equilibrium binary partitions constructed above are interior for any x , such that g(E(2"), x") =0 and £2") = (p07, y", 2") (0, P). (0,1) x RXR By construction, g(2") defines an equilibrium lst of strategies, (a,c7,3) x2x° in which: a(p)=1 if p 0°; Alm? )=y"; and Sn) QED.CCostty INFORMATION 963 When the receiver is ex ante certain that the sender is informed, the two actions clicited in any binary partition equilibrium are bounded apart; in particular, at 2 all sender types weakly prefer the larger of the two actions and so no further dispersion of preferences can support an influential equilibrium. However, under receiver uncertainty, {8 preferences diverge the elicited actions in a binary partition equilibrium in which the low types pool with the uninformed sender converge to the receiver's best decision ‘conditional on the prior G alone. Consequently, in such an equilibrium at £ there exist informed sender types who strictly prefer the smaller of the two elicited actions. (And it {not hard to show that in any influential equilibrium, some informed types necessarily, pool with the uninformed sender.) Tn conclusion, it is worth making two observations on the model of information acquisition here. First, it should be clear that the result goes through if Nature is ‘assumed to choose whether the sender is informed and nature’s decision is private information to S. And second, the assumption that p is distributed on (0,2) insures the receiver can never be sure that the sender is informed. Since this is the only role of the assumption it can, as demonstrated in Section 3, be considerably relaxed. Dept. of Political Science, University of Rochester, Rochester, NY 14627, U.S.A. Manuscript received May, 1992; inal revision received October, 1993 REFERENCES Crawronn, V., AND J, Smet (1982): 1431-1451 Faatrts, J, an R, Ginnons (1989): “Cheap Talk Can Matter in Bargaining,” Joumal of Economic ‘Theor, 48, 221-237 Gutioax, T, axo K. Krentes. (1987): “Collective Decision Making and Standing Committees: An Informational Rationale for Restrictive Amendment Procedures” Jounal of Law, Economics, and Organization, 3, 14513. Marmtews, 8. (1989) “Veto Threats: Rhetoric in a Bargaining Game,” Quarterly Jounal of “Economics, 104, 47~369, Mivonon, R, aN J, Rosears (1986: “Relying on the Information of Interested Parties,” Rand Sournal of Economics, 17, 18-32, COnunorFuitwaKa, M, A. Posrewarre, axp K, Suzumuna (1990): *S "Review of Economic Studies, 87, 25-8. tegc Information Transmission,” Econometrica, SO, sie Revelation of