Informed Principal

with Saori Chiba

October 2018

We study a cheap talk model in which the principal and agent are both privately informed. Both players' information is non-overlapping and jointly determines an optimal decision for the organization. Further, in our model, the principal can send a cheap talk message to the agent, which is followed by the agent's cheap talk and then the principal's decision making. We show that the informed principal's talk has no effect on the agent's information transmission in the principal's preferred equilibria, and the upper bound of the principal's expected utility is the same for all perfect Bayesian equilibria in standard models; optimal decisions are only additively or multiplicatively separable in the two players' information, and their preferences are represented by quadratic loss functions.