Equilibrium Selection Through Forward Induction in Cheap Talk Games

This paper provides a re(cid:133)nement that uniquely selects the ex-ante Pareto dominant equilibrium in a cheap talk game. The re(cid:133)nement works by embedding any cheap talk game into a class of two-stage games where: in stage 1 sender and receiver choose their biases at a cost, and in stage 2 the cheap talk game is played. For such games, we show that a forward induction logic can be invoked to select the ex-ante Pareto-dominant equilibrium in the second stage. Games with (cid:133)xed biases (the conventional cheap talk games) are then treated as limiting cases of this larger class of games. We would like to thank Joel Sobel for suggesting that we study this problem.