Honesty, Lemons, and Symbolic Signals

Universidad del CEMA Serie Documentos de Trabajo No. 492

38 Pages Posted: 31 Jul 2012 Last revised: 7 Aug 2012

Date Written: July 2012

Abstract

Under asymmetric information, dishonest sellers lead to market unraveling in the lemons model. An additional cost of dishonesty is that language becomes cheap talk. We develop instead a model where people derive utility from actions (what they say), as well as from outcomes, so talk is costly. We find that the existence of honest agents that mean what they say is not enough to make trade more likely, unless a traceability condition that prevents arbitrage is met. When we introduce a continuum of misrepresentation cost types and qualities, full market unraveling is not possible and babbling equilibria are eliminated. More generally, costly talk is a special kind of signal, a symbolic signal that presupposes linguistic conventions, otherwise truth and falsehood, as well as misrepresentation costs, are undefined.

Keywords: asymmetric information, honesty, trust, symbols, signals, costly talk

JEL Classification: D8, C7

Suggested Citation

Streb, Jorge Miguel and Torrens, Gustavo, Honesty, Lemons, and Symbolic Signals (July 2012). Universidad del CEMA Serie Documentos de Trabajo No. 492, Available at SSRN: https://ssrn.com/abstract=2120779 or http://dx.doi.org/10.2139/ssrn.2120779

Jorge Miguel Streb (Contact Author)

Universidad del CEMA ( email )

Av. Cordoba 374
Buenos Aires, CABA
Argentina

HOME PAGE: http://www.ucema.edu.ar/u/jms/

Gustavo Torrens

Indiana university ( email )

Wylie Hall, 100 S Woodland Ave
Bloomington, IN 47405-7104
United States
8128568131 (Phone)
47405-7104 (Fax)

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