Cheap Talk

In markets with asymmetric information, only sellers have knowledge about the quality of goods. Sellers may of course make a declaration of the quality, but unless there are sanctions imposed on false declarations or reputations are at stake, such declarations are ...

We here develop a model of pre-play communication that generalizes the cheap-talk approach by allowing players to have a lexicographic preference, second to the payoffs in the underlying game, for honesty. We formalize this by way of an honesty (or truth) correspondence between actions and statements, and postulate two axioms met by natural languages. The model is applied to finite and symmetric two-player games and we establish that honest communication and play of the Pareto dominant Nash equilibrium together characterize the unique evolutionarily stable set in generic and symmetric n×n-coordination games. In particular, this holds even in Aumann's (1990) example of a Pareto dominant equilibrium that is not self-enforcing.

Bureaucracy is featured by vertical hierarchical structure in which the decision maker usually lacks direct access to the informed agent, and the span of discretionary authority decreases top down. In this paper we analyze the performance of delegation mechanism in three-level hierarchies. The decision maker delegates authority to a biased mediator, then the mediator makes further delegation decision. We provide a full characterization of the implemented delegation set. It’s shown that the e¢ ciency is attained if and only if the mediator’s bias lies between the DM and the sender. On the other hand, given the bias of the mediator, the optimal sender should lie between the mediator and the DM. We also show that under certain conditions that the loyal agent doesn’t get promotion, and complete delegation to the mediator may be bene…cial if the DM is uncertain about the bias of the sender. We then compare the performance of delegation with communication (mediator cheap talk), and revers...

This paper studies extensive form games with public information where all players have the same information at each point in time. We prove that when there are at least three players, all communication equilibrium payoffs can be obtained by unmediated cheap-talk procedures. The result encompasses repeated games and stochastic games.

Maintaining sufficient levels of competition ranks among the core interests of any national – and increasingly international – antitrust policy; however, the formal proof that a cartel really functioned economically and did not only exist in a legal sense is hard to deliver: market power is not identical to the existence of a legal cartel unless the monopolistic frontier is reached; the legal proof of a cartel does not imply that the market was harmed. From an economic point of view, focusing on legal proof of a cartel is fruitless unless collusion resulted in excess profits or excess revenues. This economic evidence, however, rests empirically on the proper definition of comparable markets, and a sound statistical methodology. When in spring 2003, the German Antitrust Agency (GAA) fined the German cement industry – € 661 million for having established quotas in each of the four market regions through the end of 2001, the legal issue seemed beyond doubt as, beside formal inquiries, ...

Genetically modified (GM) crops could increase economic growth and enhance living standards in Africa, but political issues have slowed the use of biotechnology. This is the first study that assesses the potential impact of GM crops in Africa while considering the preferences of producers and consumers towards GMOs as well as the income and price risks they face. The study uses a choice experiment to estimate the ex ante economic impact of a novel technology, Bacillus thuringiensis (Bt) cowpea, on producers and consumers in Benin, Niger and northern Nigeria. The experiment involves the simulation of a market transaction similar to those in open air markets in West Africa. During the market simulation, respondents are informed about the advantages and disadvantages, including health risks, of Bt cowpea. The results from the study suggest that cowpea growers and consumers in Benin and northern Nigeria prefer Bt to conventional cowpea for health safety reasons. The results estimate that social welfare in Benin, Niger and northern Nigeria would increase by at least US$11.82 per capita annually with Bt cowpea, if seed sectors are operating smoothly. With inefficiencies in seed sectors and the potential for cowpea acreage increase, the estimated social welfare increase in the region would be about US$1.26 per capita annually.

This paper assesses consumers’ willingness to pay (WTP) for organic chicken using a choice experiment. Specifically, we examined consumers’ WTP for a general organic label and a USDA certified organic label on chicken breast. Our results indicate that consumers are willing to pay a premium of 1.193$/lb (34.8%) for the general organic label and 3.545 $/lb (103.5%) for the USDA

The Type Indeterminacy model is a theoretical framework that formalizes the constructive preference perspective suggested by Kahneman and Tversky. In this paper we explore an extention of the TI-model from simple to strategic decision-making. A 2X2 game is investigated. We first show that in a one-shot simultaneaous move setting the TI-model is equivalent to a standard incomplete information model. We then let the game be preceded by a cheap-talk promise exchange game. We show in an example that in the TI-model the promise stage can have impact on next following behavior when the standard classical model predicts no impact whatsoever. The TI approach differs from other behavioral approaches in identifying the source of the effect of cheap-talk promises in the intrinsic indeterminacy of the players' type.

Provision of real-time information by a firm to its customers has become prevalent in recent years in both the service and retail sectors. In this paper, we study a retail operations model where customers are strategic in both their actions and in the way they interpret information, whereas the retailer is strategic in the way it provides information. This paper

The field of social psychology explores how a person behaves within the context of other people. The social context can play a substantive role in non-market allocation decisions given peoples choices and values extend beyond the classic market-based exchange institution. Herein we explore how social psychology has affected one aspect of environmental economics: preference elicitation through survey work. We discuss social representation, social isolation, framing through cheap talk, and commitment theory ...

Abstract: This Essay addresses an anomaly in trespass law. Trespass law is generally understood as the paradigmatic example of property-rule protection: an owner can obtain an injunction against the trespasser and have him removed from her land. The property-rule protection enjoyed by the owner protects her right to exclude others and to set the price for the use of her property. However, the property-rule protection only exists ex ante: it avails only against imminent or ongoing trespasses. Ex post, after a trespass ends, the owner ...

The paper argues for the relevance of procedural justice to social choice and presents supporting evidence from primary data on voter attitudes. A preliminary section proposes and discusses five propositions that indicate the potential value and significance of processes for social ...

This paper studies a model of announcements by a privately in-formed government about the future state of the economic activity in an economy subject to recurrent shocks and with distortions due to income taxes chosen by majority voting. Although transparent com-munication would ex ante be desirable, we find that even a benevolent government may ex-post be non-informative, in an attempt to coun-tervail the tax distortion with a ‘second best ’ compensating distortion in information. This result provides a rationale for independent na-tional statistical offices, committed to truthful communication. We also establish a novel link between transparency and inequality, me-diated by the shape of labor supply and by the effect of inequality on tax distortions.

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distorti...