Reputation, cheap talk and delegation

Abstract

A decision maker is contemplating an action whose outcome is state dependent. She has a 'prior' over the states of the world and before choosing an action, she can consult an 'expert'. We model the communication game between the decision maker and the expert as a 'cheap-talk' game. Expert quality however is heterogenous. Some can obtain informative signals while the others can not. Since an expert known to be informed earns a rent in the future, uninformed experts would like to disguise as informed. We show that such concern for future reputation imposes severe constraints on the possibility of beneficial communication. Decision makers who can benefit from such communication are characterized in terms of the relevant parameters which include the prior of the decision makers and the cost of mistaken decisions. Next we address the issue of delegation. The questions that we ask are which decision makers choose to delegate, and to whom they delegate. In situations involving public goods, we characterize the decision makers who will strictly prefer to delegate, and show that when delegation occurs, the delegate is necessarily more extreme than the original decision maker in terms of her prior.