Cheap Talk, Prices and Crises: An Experimental Study

34 Pages Posted: 14 Oct 2011

See all articles by Hong Qu

Hong Qu

Kennesaw State University - Michael J. Coles College of Business

Date Written: October 14, 2011

Abstract

This paper studies the role of public information in multiple-agent coordination problems underlying a variety of economic scenarios such as banking and debt crises. The impact of information on coordination in such settings rests on the interplay between two types of uncertainty that agents face: fundamental and strategic uncertainty (i.e. uncertainty about others’ actions). In a controlled laboratory setting, I study the impact of two key sources of public information on coordination: market prices and cheap talk (i.e. non-binding promises). I find that although informationally efficient market prices reduce fundamental uncertainty, efficiency of coordination does not improve because strategic uncertainty intensifies. In contrast, costless nonbinding cheap talk significantly improves coordination as it reduces strategic uncertainty.

Keywords: coordination game, cheap talk, asset market, experimental economics

JEL Classification: C7, C9, D8

Suggested Citation

Qu, Hong, Cheap Talk, Prices and Crises: An Experimental Study (October 14, 2011). Available at SSRN: https://ssrn.com/abstract=1944212 or http://dx.doi.org/10.2139/ssrn.1944212

Hong Qu (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

HOME PAGE: http://https://works.bepress.com/hong-qu/

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