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How Verifiable Cheap-Talk Can Communicate Unverifiable Information

  • Robert Bloomfield

    ()

  • Vrinda Kadiyali

    ()

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    This study describes a “cheap-talk” model in which sellers can credibly convey unverifiable information by choosing whether or not to exaggerate verifiable information. We find that unexaggerated claims can communicate favorable unverifiable information if buyers are not too likely to verify claims, and sellers with better information care more about future prices than sellers with worse information. However, there is always another equilibrium in which sellers exaggerate all verifiable claims. Laboratory tests show that when buyers infrequently verify the sellers' claims, players converge to the equilibria close to the example provided in instructions. When buyers are very likely to verify claims, players fail to converge to any equilibrium. Both of these results are consistent with an evolutionary learning model, but inconsistent with the intuitive criteria of Cho and Kreps (1987). We discuss the implications of our results for both consumer and financial markets. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11129-005-2778-9
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    Article provided by Springer in its journal Quantitative Marketing and Economics.

    Volume (Year): 3 (2005)
    Issue (Month): 4 (December)
    Pages: 337-363

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    Handle: RePEc:kap:qmktec:v:3:y:2005:i:4:p:337-363
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=111240

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    1. Farrell, J. & Gibbons, R., 1989. "Cheap Talk With Two Audiences," Working papers 518, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Moorthy, Sridhar & Ratchford, Brian T & Talukdar, Debabrata, 1997. " Consumer Information Search Revisited: Theory and Empirical Analysis," Journal of Consumer Research, University of Chicago Press, vol. 23(4), pages 263-77, March.
    3. Rizzo, John A & Zeckhauser, Richard J, 1990. "Advertising and Entry: The Case of Physician Services," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 476-500, June.
    4. Brandts, Jordi & Holt, Charles A, 1992. "An Experimental Test of Equilibrium Dominance in Signaling Games," American Economic Review, American Economic Association, vol. 82(5), pages 1350-65, December.
    5. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-79, May.
    6. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
    7. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
    8. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    9. Blume, A., 1994. "Evolution of the Meaning of Messages in Sender-Receiver Games : An Experiment," Discussion Paper 1994-91, Tilburg University, Center for Economic Research.
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