1. Partly Verifiable Signals
Glazer and Rubinstein (ECMA 2004)

2. Information Transmission in Markets
S-R setting with type independent preferences of S
Benchmarks:
- Cheap Talk (only bubbling equilibrium)
- Perfectly (costlessly) verifiable types (only fully revealing equilibrum)
Realistic Settings: fact checking is costly and verification is partial
Questions:
- Uncertainty about verifiability
- Which party should verify information?
- Optimal verification effort?
- Does prior communication improve verification process?
- If yes, what is the optimal verification mechanism?

3. Partial verification State space where is an aspect and quality is
Uncertainty about verification (Shin 2003)
Low types S strategically withhold negative information
Pooling at the bottom
Uncertainty mutes R’s skepticism
result in asymmetric return dynamics
Unaware buyers (Milgrom and Roberts 1986)
R unaware which characteristics are relevant
S announce high but irrelevant test scores
Test scores ignored by R
With heterogenous buyers competition among S better than regulation

4. Costly verification Costly verification by a sender (Jovanovic 1982)
Excessive testing and selective reporting (data mining)
Welfare loss (as in the signaling literature)
Costly verification by a receiver (Townsend 1979)
Insurance against wealth shocks
S informs about the wealth shock
R can verify the claim at some cost
Optimal contract: no verification until default
Today: capacity constraint (can verify only one aspect)

5. Motivating example
A candidate with two characteristics (talent, loyalty) and an employer
Decision: hire, not hire
Candidate (sender, speaker)
- strictly prefers action ``hire’’
- can send a message regarding his characteristics
Employer (receiver, listener)
- wants to hire only if sum of characteristics above one
- has capacity to verify only one characteristic
Questions:
Can employer reduce probability of a mistake by talking to a candidate?
If yes, how should he verify information obtained in the conversation?

6. Glazer and Rubinstein persuasion game
State space with aspect
Action space
Sender always prefers
Acceptance and rejection region
Verification mechanism

7. Preferences over Verification Mechanism
Fix
Let
R preferences over verification mechanisms
Type one error Type two error
mechanism is R-optimal if it solves
Remarks:
We search for the best verification mechanism for R
Commitment (this assumption is relaxed)
More general loss function and arbitrary prior

8. Important classes of Mechanisms
Direct mechanism
Deterministic mechanism
Bubbling mechanism

9. Does conversation improve welfare?
Consider candidate-employer problem
Bubbling mechanism improves over no verification
Conversation improves over a ``bubbling’’ mechanism

10. L-principle Assume Consider any three types forming ``L’’
P: For any mechanism the sum of mistake probabilities is
``Mass of independent ``Ls’’ gives a lower bound for the number of mistakes
Easy check of mechanism optimality

11. Proof: L-principle
Fix mechanism and Let be optimal for