Does Cheap Talk Promote Coordination Under Asymmetric Information? An Experimental Study on Global Games

Abstract

This study experimentally investigates the role of two-sided cheap talk in decisions under asymmetric information. Unlike previous studies, our study also considers endogenous investment timing. In our experiments, subjects play two-player global games with asymmetric information. Before making any decision, a subject sends the other player in the same group a free message that takes the form of a continuous numerical value. We observe that subjects tend to send messages that accurately reflect their own private signals. This tendency is stronger when a subject can observe the other player's decision by delaying his own decision at a small cost. Further, our data present some evidence that subjects tend to reach a fully revealing equilibrium by using threshold strategies according to their own private signals and the other players' messages. We also observe that a subject’s welfare improves significantly under such cheap talk.

Keywords: Global Games, Cheap Talk, Endogenous Timing, Welfare Analysis

JEL Classification: C70, C91, D82, D83