Abstract
This paper describes an intuitive way in which cheap talk can matter in a twostage bargaining game in which talk may be followed by serious negotiation. The intuition that all buyers would claim to have low reservation prices is incorrect in our model. Instead, if good-faith participation is endogenously determined then the parties can use talk to trade off bargaining position against the probability of continued negotiation. Our cheap-talk equilibrium features bargaining behavior that could not be equilibrium behavior in the absence of talk.
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