Abstract
AbstractWe ask how buyers can make use of bilateral communication in a procurement setting with moral hazard. We focus on a setting where buyers and potential sellers can exchange cheap‐talk messages before trading and where the seller is determined via a buyer‐determined procurement auction. In this type of auction, buyers can freely choose among bidders based on bidders' observable characteristics and the prices they ask for. In a controlled laboratory experiment, we found that buyers use free‐form text messages to make requests and to reduce social distance. The relationship between the offers sellers make and the messages they send is mediated by buyers' requests. But, in general, buyers may increase their profits by choosing sellers who promise high quality or large profits. Furthermore, despite the cheap‐talk nature of requests, buyers in our experiment increase their profits by specifically demanding high quality or large profits.
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