Money Talks? An Experimental Investigation of Cheap Talk and Burned Money

Abstract

We experimentally study the strategic transmission of information in a setting where both cheap talk and money can be used. Theoretically, many equilibria exist side by side, in which senders use either costless messages, money, or both. We find that senders prefer to communicate through costless messages. Only when the interest disalignment between sender and receiver increases does cheap talk tend to break down and high sender types start burning money to enhance the credibility of their costless messages. A behavioral model assuming that sellers bear a cost of lying fits the data best.