CMER WORKING PAPER No. 08-61
In an information transmission situation, a senders concern for its credibility could endow itself with an invisible power to control the detected. In this case, the sender can achieve its favored outcome without losing its credibility, which stays true even when the sender and the receiver have contradictory preferences. Therefore, the senders concern for its credibility could result in less truthful signals from the sender and worse payoffs to the receiver. This is the paradox of credibility. This paper models this paradoxical role of the senders credibility concern.