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Reference-Dependence and Credible Information Transmission

28 gennaio 2013
Ex Boccherini - Piazza S. Ponziano 6 (Conference Room )
I consider the interaction between an informed agent (S) who can make announcements concerning her information and an uninformed agent (R) who has to decide whether to start a project or not. I show that reference dependence and loss aversion a là Kosegi and Rabin lead to credible information transmission. This happens because inaccurate information has two effects: it leads R to choose the action S prefers in the short run, but it also generates unrealistic expectations that, through the effect on reference point, may induce R to take long run actions that hurt S. This phenomenon is not possible in a model where the uninformed agent is a standard expected utility maximizer. I further investigate the role of reference dependence in settings where S can write verifiable contractual clauses to reinforce her credibility. I show that these contractual clauses may lead to credible information transmission, but this involves monetary transfers that may vary non-monotonically with the degree of loss aversion