Coordination in games with incomplete information: experimental results

We use experiments to study coordination in games with incomplete information and ask whether an informed player can use cheap talk strategically. Two players decide whether to enter a market where stage game payoffs either form a prisoner’s dilemma or a stag-hunt. One player knows which stage game is played while the other knows only the associated probabilities. When players engage in a prisoner’s dilemma each player prefers unilateral entry. When payoffs form a stag-hunt game, the outcome where neither enters Pareto dominates the outcome where both enter. We ask whether cheap talk aids coordination on the Pareto dominant outcome and whether the informed player can use cheap talk to engineer her preferred outcome. Consistent with previous literature, the benefit of cheap talk depends on the relationship between payoffs and risks. We find that cheap talk benefits informed players only when payoff risks are low. Key Words: cheap talk, coordination, experiments, incomplete information, risk dominance, payoff domiance