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
Date Written: August 30, 2021
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: Suggested Citation