Three essays on communication games and behavioral economics
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This dissertation consists of three chapters devoted to the study of communication games and behavioral economics. The first chapter extends the cheap talk model of Crawford and Sobel (1982) (CS). In CS, a speaker (S) uses cheap talk to persuade a decision maker (DM) to select an action as profitable to S as possible. This paper shows that the presence of an outside option -- that is, allowing DM to avoid taking any action, yielding state-independent reservation utilities to DM and S -- has an important qualitative impact on the results. Contrary to CS, in this model, the informativeness of communication is not always decreasing in the level of conflict of interest. Relatedly, communication can be more informative than in CS. The second chapter uses a different version of my cheap talk model with an outside option to explore managerial issues such as delegation and interpersonal authority. In this chapter, actions are costly for DM, and S's information is noisy. Hence, the agents may agree or disagree on the ex-ante ranking over projects, and DM may choose not to carry out any project. Unlike in the standard cheap talk model (without an outside option), when their ex-ante rankings coincide, S is more tempted to lie and hide bad news about both agents' ex-ante most preferred project because DM is highly likely to carry it out. Consequently, when their ex-ante rankings coincide, DM can have less incentives to delegate the choice of project to S and more incentives to use interpersonal authority than when their ex-ante rankings differ. The third chapter develops a theory of "personal rules" to explain a paradoxical stylized fact that increasing punishment rates can increase crime. This theory, based on the tradeoff between one's self-image of criminal productivity and the temptation of committing a crime, analyzes the way the agent may transform lapses into precedents. The foundation for this transformation is imperfect recall of one's own criminal productivity, which leads people to draw inaccurate inferences from their past actions. Rationalization may lead them to overestimate the utility of committing a crime when the opportunity presents itself.