Cheap Talk
Costless, non-binding, and verifiable communication prior to play that can influence equilibrium selection.
Definition
In the Crawford-Sobel (1982) model, a privately informed sender sends a costless, non-binding message; the receiver then chooses an action. Because messages are costless, they are "cheap" — only the sender's preferences link messages to types.
Cheap talk can be informative only if sender and receiver preferences are sufficiently aligned (the "no-babbling" condition).
Intuition
Words cost nothing, so why believe them? Cheap talk works only when lying would hurt the liar's credibility.
Partial alignment of interests makes some information transmission possible — the "babbling" equilibrium (no information) always exists.
Worked example
A manager making a forecast to investors: if both want the stock price to reflect true value, the forecast can be credible.
Political endorsements: if both voter and candidate want good policy, the signal conveys information.
The math
In the CS interval model with one-dimensional types and quadratic preferences, there exist informative equilibria partitioned into intervals when preference divergence is not too large.
The number of partition elements in the most informative equilibrium decreases as preference divergence grows.
Where it is used
Political communication, corporate disclosures, advertising, and pre-trial negotiation.
Foundational model in information economics and political science.
More in Game theory
Assembled from the ReLU.chat curated knowledge base. These explanations are concise on purpose; check the sources for anything important.