On the Limits of Cheap Talk for Public Good Provision

22 Pages Posted: 26 Mar 2012

See all articles by Francisco Costa

Francisco Costa

FGV EPGE Brazilian School of Economics and Finance

Humberto Moreira

Fundacao Getulio Vargas (FGV)

Date Written: January 18, 2012

Abstract

We study a situation where, as a consequence of private information, agents do not have the incentive to invest in a public good if they are unable to have prior discussion with their partners. We show that in a voluntary contribution mechanism with cheap talk, any finite message space does not provide efficiency gain relative to a binary message space when agents truthfully report their type. Using laboratory experiments, we observe that communication is a useful mechanism to enhance efficiency, mainly by allowing players to coordinate on the zero contribution when the project is not desirable for at least one of them. However, we find that such efficiency gain seems to be very limited, since the simplest communication structure ("Yes" or "No" messages) provides the same incentives to the agents as larger message spaces.

Keywords: voluntary contribution mechanism, incomplete information, communication, cheap talk, threshold equilibria, experiments, coordination games

JEL Classification: C72, C91, D83, H41

Suggested Citation

Costa, Francisco and Moreira, Humberto, On the Limits of Cheap Talk for Public Good Provision (January 18, 2012). Available at SSRN: https://ssrn.com/abstract=2029331 or http://dx.doi.org/10.2139/ssrn.2029331

Francisco Costa (Contact Author)

FGV EPGE Brazilian School of Economics and Finance ( email )

Praia de Botafogo 190/1119C
Rio de Janeiro RJ 22253-900
Brazil

HOME PAGE: http://https://sites.google.com/site/fjmcosta/

Humberto Moreira

Fundacao Getulio Vargas (FGV) ( email )

R. Dr. Neto de Araujo 320 cj 1307
Rio de Janeiro, Rio de Janeiro 22250-900
Brazil

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