Reference Dependence, Risky Projects and Credible Information Transmission

We consider a model in which an informed Sender (S) makes an announcement con- cerning the quality of a project that an uninformed Receiver (R) can undertake or not. We study the role that reference dependence and loss aversion may play in affecting S? communication strategy and we show that they may give rise to credible information transmission. This happens because in our model inaccurate information has two effects: it leads R to choose the action S prefers in the short run, but it also generates unrealistic expectations that, through their effect on reference point's formation, may induce R to take actions that hurt S in the long run. On the contrary, credible information transmis- sion is not possible if R is a standard expected utility maximizer (no reference dependence) or if his loss aversion is either too high or too low.