Asymmetric information: in a (two player) game if one player knows more than the other.
1. adverse selection: a player has private information about her type. ( e.g. her preferences, her skills, the quality of her product, or her possible strategies).
2. moral hazard: the actions of one player cannot be observed by the other player.
The better-informed player may want to do one of the followings:
1. Conceal information or reveal misleading information: when mixing moves in a zero-sum game, you don’t want the other player to see what you have done; you bluff in poker to mislead others about your cards.
2. reveal selected information truthfully: when you make a strategic move, you wan others to see what you have done so that they may respond in the way you desire.
The less-informed player may want to do one of the followings:
1. elicit information of filter truth from falsehood: an employer wants to find out the sikll of a prospective employee and the effort of a current employee.
2. remain ignorant: being unable to know your opponent’s strategic move can immunize you against his commitments and threats. And top-level politicians or managers often benefit from having ‘credible deniability’.
The better informed player is signalling if she takes an action to make others believe that her information is favourable.
The less informed player is screening if she chooses a strategy that induces her opponent to reveal some information.
- cheap talk and direct communication are however credible and can thus be advantageous if the players’ interests are aligned.
- Although talk is generally cheap, but the better-informed player may not tell the truth.
- Direct communication is thus often not credible, and it is then better to look at how a player behaves than at what she says!
- Cheap talk can help players to choose between multiple equilibria. An equilibrium achieved through these means is called a cheap talk...