Does cheap talk promote coordination under asymmetric information? An experimental study on global games

Abstract

This study experimentally investigates the role of two-sided cheap talk in decisions under asymmetric information. Unlike previous studies, we also consider endogenous investment timing. In the experiment, subjects play two-player global games with asymmetric information. Before making any decision, a subject sends the other player a free message that takes the form of continuous numerical value. The results show that both the cheap talk and the endogenous investment timing improve the efficiency of investments significantly, but the effect of the former is weaker than that of the latter. Moreover, data shows that when subjects’ decision timing is endogenous, additional information from the cheap talk cannot further improve investment efficiency. Finally, the data report a high proportion of subjects sending truth-telling messages, which is close to the value of the private signal. However, some subjects send exaggerated messages that are higher than their private signals, and the proportion of these subjects increases with time.