Cheap Talk, Efficiency and Egalitarian Cost Sharing in Joint Projects

Abstract

Rarely, if ever, do parties contemplating a joint project commit resources without engaging in non-binding discussions on who does what. Here we argue that such noncommittal discussions may be essential to complete a joint project. We make this point by identifying an interesting class of situations where the private information of the two parties is such that, absent prior discussions, the project is never undertaken. However, with a prior stage of communication, all ex-ante and interim efficient equilibria exhibit a simple structure besides leading to the project's completion with a positive probability. What is more, the equilibrium outcome that maximizes the sum of players' ex-ante welfare is curiously egalitarian - whenever the project is completed, each party contributes toward exactly half the cost, independent of her private information.

Keywords: Cheap talk, efficiency, egalitarian cost sharing, joint projects, voluntary public contribution

JEL Classification: C72, H4