Managerial Economics of Cheap Talk

Consider an uninformed decision maker (DM) who communicates with a partially informed speaker (S) through cheap talk. DM can choose a project to implement or the outside option of no project. We show that if the agents' ex-ante rankings over projects do not coincide, then this conflict of interest can reduce S's incentive to pander and hence facilitate information transmission. Intuitively, S's ex-ante bias and the incentive to pander affect S's information revelation in opposite directions and hence offset each other. We also explore the relationship between information transmission and managerial issues such as delegation, disclosure, and interpersonal authority