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How Verifiable Cheap-Talk Can Communicate Unverifiable Information

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  • Robert Bloomfield

    ()

  • Vrinda Kadiyali

    ()

Abstract

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

Suggested Citation

  • Robert Bloomfield & Vrinda Kadiyali, 2005. "How Verifiable Cheap-Talk Can Communicate Unverifiable Information," Quantitative Marketing and Economics (QME), Springer, vol. 3(4), pages 337-363, December.
  • Handle: RePEc:kap:qmktec:v:3:y:2005:i:4:p:337-363
    DOI: 10.1007/s11129-005-2778-9
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    File URL: http://hdl.handle.net/10.1007/s11129-005-2778-9
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    References listed on IDEAS

    as
    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    2. repec:hoo:wpaper:e-89-7 is not listed on IDEAS
    3. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap Talk with Two Audiences," American Economic Review, American Economic Association, vol. 79(5), pages 1214-1223, December.
    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 1350-1365, December.
    5. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-279, May.
    6. 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.
    7. Moorthy, Sridhar & Ratchford, Brian T & Talukdar, Debabrata, 1997. " Consumer Information Search Revisited: Theory and Empirical Analysis," Journal of Consumer Research, Oxford University Press, vol. 23(4), pages 263-277, March.
    8. Blume, A. & De Jong, D.V. & Kim, Y.G. & Sprinkle, G.B., 1994. "Evolution of the Meaning of Messages in Sender-Receiver Games: An Experiment," Papers 9491, Tilburg - Center for Economic Research.
    9. Johnson, Eric J & Russo, J Edward, 1984. " Product Familiarity and Learning New Information," Journal of Consumer Research, Oxford University Press, vol. 11(1), pages 542-550, June.
    10. 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.
    11. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
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