Dynamic information preference and communication with diminishing sensitivity over news

Abstract

A Bayesian agent experiences gain–loss utility each period over changes in belief about future consumption (news utility) with diminishing sensitivity over the magnitude of news. Diminishing sensitivity induces a preference over news skewness: gradual bad news, one‐shot good news is worse than one‐shot resolution, which is in turn worse than gradual good news, one‐shot bad news. So the agent's preference between gradual information and one‐shot resolution can depend on his consumption ranking of different states. In a dynamic cheap‐talk framework where a benevolent sender communicates the state over multiple periods, the babbling equilibrium is essentially unique when the receiver is not loss averse. Contrary to the commitment case, more loss‐averse receivers may enjoy higher news utility in equilibrium. We characterize the family of gradual good‐news equilibria when facing such receivers and find that the sender conveys progressively larger pieces of good news.