BIG-FISH LIES: A SIMPLE APPLICATION TO MONETARY ECONOMICS

Abstract

We provide an alternative to Bayesian updating in cheap-talk games, which
does not require the receiver know the sender’s type distribution. This is done through
an anecdotal application, in which a fisherman reports to his friends the size of a fish he
caught in the city’s lake. Our findings show that the fisherman will always report a size
higher than the mean, and this reported value is independent on the actual size of the
caught fish. This result holds as long as the fisherman presents no aversion to lie and no
reputation concerns. We illustrate the applicability of our approach through a simple
model of monetary economics, in which a central bank must choose the level of the
economy’s interest rate in order to control inflation based on the inflation expectation
reported by heterogeneous and self-interested agents.