Cheap-Talk Disclosure of Negative Information and Risk-Averse Buyers

Seoul Journal of Economics, Vol. 34, No. 3, 2021

28 Pages Posted: 2 Sep 2021 Last revised: 3 Sep 2021

See all articles by David Seung Huh

David Seung Huh

Incheon National University - College of Business Administration

Dmitry Shapiro

Department of Economics, Seoul National University

Date Written: August 30, 2021

Abstract

In this paper, we study the incentives of low-quality sellers to separate them from high-quality sellers. We consider a framework with asymmetric quality information where the only way to communicate quality is via cheap-talk messages. In this framework, any separating strategy pursued by high-quality sellers can be imitated costlessly by low-quality sellers. We show that in the duopoly setting with risk-averse buyers, equilibria exist, where low-quality sellers voluntarily disclose negative information about their products. If the seller is a monopolist or buyers are risk-neutral, such equilibria do not exist.

Keywords: Negative information, Risk aversion, Cheap talk, Product differentiation

JEL Classification: D21, D81, L15, M31

Suggested Citation

Huh, David Seung and Shapiro, Dmitry, Cheap-Talk Disclosure of Negative Information and Risk-Averse Buyers (August 30, 2021). Seoul Journal of Economics, Vol. 34, No. 3, 2021, Available at SSRN: https://ssrn.com/abstract=3915094

David Seung Huh (Contact Author)

Incheon National University - College of Business Administration ( email )

119 Academy-ro
Yeonsu-gu
Incheon
Korea, Republic of (South Korea)

Dmitry Shapiro

Department of Economics, Seoul National University ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742

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