Authority and Information Acquisition in Cheap Talk with Informational Interdependence

Daniel Habermacher (University of Warwick)

Abstract: I study the allocation of decision rights in a two-dimensional cheap talk game with informational interdependence and imperfectly informed senders (agents). The Principal allocates decision rights among all players including herself, thus determining incentives for communication. Delegation is optimal when the expected informational gains outweigh the loss of control due to a biased decision. Because delegation breaks the interdependence between decisions, the informational gains may refer to the decision the Principal retains. This implies that negative informational externalities (Levy and Razin, 2007) can lead to Partial Delegation. I also analyse agents' incentives for information acquisition. An agent invests in a single piece of information when the expected utility gains from revealing it compensate its costs. Truthful communication is thus a necessary condition for information acquisition. But the information transmitted must also have substantial influence on beliefs –i.e. few other agents acquire (and reveal) the same information in equilibrium. As a consequence, the Principal strictly prefers centralization when the cost of information is sufficiently large. When an agent specializes he avoids the possibility of observing contradictory information, enhancing communication incentives. Finally, delegation implies that decision-makers will typically receive more information about the more relevant state, a situation I call ex-post specialization.

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