DP13488 Partial Language Competence

Author(s):	Jeanne Hagenbach, Frédéric Koessler
Publication Date:	January 2019
Keyword(s):	analogy-based expectations, Bayesian solution, bounded rationality, cheap talk, Language
JEL(s):	C72, D82
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13488

This paper proposes an equilibrium concept, Language-Based Expectation Equilibrium, which accounts for partial language understanding in sender-receiver cheap talk games. Each player has a privately known language competence representing all the messages that he understands. For the messages he does not understand, he has correct but coarse expectations about the equilibrium strategies of the other player. In general, a language-based expectation equilibrium outcome differs from Nash and communication equilibrium outcomes, but is always a Bayesian solution. Partial language competence of the sender rationalizes information transmission and lies in pure persuasion problems, and facilitates information transmission from a moderately biased sender.