Equilibrium Selection Through Forward Induction in Cheap Talk Games

This paper provides a refinement that uniquely selects the ex-ante Pareto dominant equilibrium in a cheap talk game. The reÖnement 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 fixed biases (the conventional cheap talk games) are then treated as limiting cases of this larger class of games.