Cheap Talk Research Articles

Communication in the shadow of catastrophe

We perform distributional comparative statics in a cheap talk model of adaptation. Receiver borne adaptation costs drive a wedge between the objectives of sender and receiver that is increasing in the magnitude of adaptation. We allow for infinite supports with infinite disagreement at the extremes and compare communication to unconstrained delegation. We study increases in risk that arise from transformations of the state variable. We find that linear transformations (implying increases in variance) decrease communication and delegation payoffs but do not change their ranking. By contrast, increasing, convex transformations (implying increases in tail risk) decrease the communication payoff relative to the delegation payoff. Our finding extends to the comparison of distributions with thin versus heavy tails.

Cheap talk with two-sided private information

This paper studies how the transmission of information from a biased expert to a decision maker is affected when the latter has access to an unbiased symmetric private signal. The extra information has two distinct effects on the expert's incentives to communicate. First, there is an information effect that allows the decision maker to choose a better action on expectation. This reduces the implicit cost of transmitting coarse messages and hence hampers communication. Second, there is a risk effect that arises because the extra information introduces uncertainty to the expert. For risk averse experts, this effect increases the cost of sending coarse messages and hence favours communication. I show that the information effect dominates the risk effect, and for any symmetric signal structure there are always sufficiently biased experts for which communication is no longer possible in equilibrium. Moreover, for any bias of the expert, no communication is possible if the signal structure is sufficiently precise. For the uniform signal structure I show that communication decreases with the precision of the signal. Finally, I provide non degenerate examples for which the decision maker's private information cannot make up for the loss of communication implying that the welfare of both agents decreases.

Biased Mediators in Conflict Resolution

Abstract One of the most important and disputed questions within the fields of international relations and conflict studies concerns the issue of mediator impartiality. Should mediators be biased—supportive of one but not both of the main disputants—or should mediators always be impartial? This paper contributes to this debate by studying the effectiveness of mediation with regard to the role of mediator bias in a game-theoretic model of cheap talk. This study shows that the institutional design of a mediation process is affected by two factors: the relative degree of conflict and the incentives to misrepresent private information. We find that a necessary (but not always sufficient) condition for the success of a mediation process is a sufficiently low likelihood of a misrepresentation problem. If in addition, the relative degree of conflict is low enough, mediation is effective, and the institutional design of a mediation process is the same regardless of the bias. Otherwise, the design will be quite different depending on the direction of the bias. (JEL D63, D74, D82)

How much you talk matters: cheap talk and collusion in a Bertrand oligopoly game

How much you talk matters: cheap talk and collusion in a Bertrand oligopoly game

Venture Capitalists’ Decision-Making in Hot and Cold Markets: The Effect of Signals and Cheap Talk

Venture Capitalists’ Decision-Making in Hot and Cold Markets: The Effect of Signals and Cheap Talk

Greenwashing, carbon emission, and ESG

AbstractRecent decades have seen an increasingly awareness of climate changes, putting a pressure on companies to do more to deal with carbon emission. One of the popular measures used in assessing how well a company commits to sustainable development and reduces carbon emissions is ESG ratings. Given the importance of both ESG ratings and carbon footprints on our society and the target of net zero by 2050, we explore the relation between carbon emission and the Refinitiv ESG scores for the US sample from 2005 to 2018. Our findings indicate that high ESG‐rated or environment‐rated firms do not have lower carbon emissions. It appears that these firms are not incentivized to do more for environment, as they have already been awarded with good publicity for being environmentally friendly. Finally, our findings also support the ‘cheap talk’ concept, greenwashing hypothesis and legitimacy theory. Companies are not genuinely committed to climate action.

Can a Supplier’s Yield Risk Be Truthfully Communicated via Cheap Talk?

Problem definition: When a firm (buyer) outsources the production of a new product/component to a supplier subject to random yield, a major challenge is that the supplier’s yield is usually private information. In practice, yield information is often shared via nonbinding communication—for example, a supplier self-assessment report. We examine whether such communication can be truthful and credible. Methodology/results: We analyze a cheap-talk game in which, given a simple contract that specifies the prices for each unit ordered and for each effective unit delivered, the supplier first communicates its yield level, and then the buyer determines an order quantity. We prove that truthful communication can emerge in equilibrium. To do so, we first show that if knowing the supplier’s type, the buyer will either inflate or reduce the order quantity to cope with a lower yield, depending on the product’s market potential. Under asymmetric information, the supplier will truthfully communicate its type if (i) the buyer with a high market potential intends to inflate the order quantity for a lower yield, but the buyer with a low market potential prefers to do the reverse; and (ii) the supplier is uncertain about the product’s market potential, which is the buyer’s private information, and anticipates that a hard-to-make product is more likely to have a higher market potential. Managerial implications: Truthful cheap-talk communication can emerge in equilibrium when the product’s market size and yield are negatively correlated. Truthful communication always benefits the buyer and consumers and may benefit the supplier if the product has sufficient market potential and the supplier’s production cost is not too high. Moreover, the buyer can be better off paying more for the input quantity (although part of the output is defective) or paying a higher wholesale rate if the adjustment in payment terms enhances communication credibility. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.0089 .

Cheap Talk? Strategy Disclosure Intensity, Corporate Risk‐Taking and Financial Performance

AbstractCorporate risk‐taking is key to a firm's ability to achieve competitive advantages. Drawing on the attention‐based view and the information‐processing perspective, we argue that firms with higher strategy disclosure intensity (i.e. greater frequency of ‘corporate strategy’ mentions in a firm's public disclosure) will allocate more attention to corporate strategy and develop stronger information‐processing capacities, enabling them to undertake more intensive risk‐taking. This is particularly true when investment opportunities are more abundant and the environment is more dynamic. In addition, corporate risk‐taking will lead to better financial performance when firms exhibit stronger strategy disclosure intensity. Findings from 3190 firms support our arguments. Overall, this study advances strategic management research by demonstrating that strategy disclosure intensity provides important insights into a firm's risk‐taking decisions and performance.

Mitigating cost vector effects in stated choice experiments using cheap talk and opt-out reminders

Mitigating cost vector effects in stated choice experiments using cheap talk and opt-out reminders

Cheap Talk with Transparent and Monotone Motives from a Seller to an Informed Buyer

We develop a model of cheap talk with transparent and monotone motives from a seller to an informed buyer. By transparent and monotone motives, we mean that the seller’s preference does not depend on the state of the world and is increasing in the choice(s) of the buyer regardless of the state of the world. We first show that if the buyer is completely uninformed, only the babbling equilibrium exists. Then, we obtain our main result that even if the buyer has the slightest information, full revelation can be supported by using the crosschecking strategy of the buyer if and only if the seller has a CARA (constant absolute risk aversion) utility function unless the buyer has too much information. In this equilibrium, the buyer can punish the seller who sends a message far above the buyer’s information by ignoring the seller’s message. Paradoxically, no information and too much information of the buyer both eliminate the fully revealing equilibrium with the crosschecking strategy. We also obtain a counterintuitive result that the seller prefers a more informed buyer than a less informed buyer.

Voluntary Disclosure in Asymmetric Contests

Abstract This article studies the incentives for interim voluntary disclosure of verifiable information in probabilistic all-pay contests with two-sided incomplete information. Private information may concern marginal cost, valuations, and ability. Our main result says that, if the contest is uniformly asymmetric, then full revelation is the unique perfect Bayesian equilibrium outcome. This is so because the weakest type of the underdog reveals her type in an attempt to moderate the favourite, while the strongest type of the favourite tries to discourage the underdog—so that the contest unravels. This strong-form disclosure principle is robust with respect to correlation, partitional evidence, randomized disclosures, sequential moves, and continuous type spaces. Moreover, the assumption of uniform asymmetry is not needed when incomplete information is one-sided. However, the principle may break down when type distributions are too similar, contestants possess commitment power, or information is unverifiable. In fact, cheap talk will always be ignored, even if mediated by a trustworthy third party.

Willingness to Pay Estimation for the Restoration of Water Quality of a Eutrophic Lake

Lakes are recognized as highly susceptible to the impacts of various anthropogenic activities, making them one of the most vulnerable aquatic ecosystems. These ecosystems frequently experience degradation due to the lack of policies recognizing the importance of their often overlooked regulating ecosystem services. A contingent valuation approach was employed to assess the stakeholders’ willingness to pay (WTP) for the restoration of the water quality of a eutrophic lake using the case of Tadlac Lake, situated within the municipality of Los Baños, Laguna Province, Philippines. The findings of the study revealed that households in the area expressed a WTP of Php 95.88/household/month or Php 1,150.56/household/year (1 USD=55.89 Php), with 72.30% of respondents indicating their readiness to support efforts to improve the water quality of Tadlac Lake. The likelihood of a positive response significantly varied depending on factors such as the offered price, gender, educational attainment, duration of residency, household size, income, and the method of questionnaire administration (cheap talk vs. non-cheap talk). These results underscore the community’s favorable disposition towards investing in improving Tadlac Lake’s water quality. This valuation study contributes a fresh perspective on lake management strategies. Moreover, it emphasizes the importance of environmental education regarding social-ecological dynamics as a crucial requirement for crafting comprehensive policies that will steer sustainable management of natural lake resources.

How cheap talk in climate disclosures relates to climate initiatives, corporate emissions, and reputation risk

Navigating the complex landscape of corporate climate disclosures and their real impacts is crucial for managing climate-related financial risks. However, current disclosures oftentimes suffer from imprecision, inaccuracy, and greenwashing. We introduce ClimateBertCTI, a deep learning algorithm, to identify climate-related cheap talk in MSCI World index firms’ annual reports. We find that only targeted climate engagement is associated with less cheap talk. Voluntary climate disclosures are associated with more cheap talk. Moreover, cheap talk correlates with increased negative news coverage and higher emissions growth. Hence, cheap talk helps assess climate initiatives’ effectiveness and anticipate reputation and transition risk exposure.

Efficacy of hypothetical bias mitigation techniques: A cross-country comparison

Hypothetical Bias (HB) remains challenging for practitioners of stated preference approaches. One elusive idea is the extent to which country and culture may affect HB's magnitude and the efficacy of mitigation methods. This paper implements both real and hypothetical elicitation in the United States and China in the context of a field survey and experiment for battery recycling containers to establish the extent of HB. It compares multiple HB mitigation strategies, namely Cheap Talk, Ex Ante Consequentiality, and Certainty Follow-up in the two countries. Results show that a significant amount of actual HB exists. The ex ante methods are ineffective at reducing HB in both countries. The Certainty Follow-up method can be effective but can overcorrect, especially for the Chinese sample. Results also indicate that comparing the efficacy of different mitigation strategies based on only hypothetical scenarios (potential HB) across countries may lead to erroneous conclusions. This study calls for treating country and cultural differences more seriously when conducting international valuation work.

Uniformly strict equilibrium for repeated games with private monitoring and communication

AbstractCooperation through repetition is an important theme in game theory. In this regard, various celebrated “folk theorems” have been proposed for repeated games in increasingly more complex environments. There has, however, been insufficient attention paid to the robustness of a large set of equilibria that is needed for such folk theorems. Starting with perfect public equilibrium as our starting point, we study uniformly strict equilibria in repeated games with private monitoring and direct communication (cheap talk). We characterize the limit equilibrium payoff set and identify the conditions for the folk theorem to hold with uniformly strict equilibrium.

Credibility in Crises: How Patrons Reassure Their Allies

Abstracts How do citizens of US allies assess different reassurance strategies? This article investigates the effects of US reassurance policies on public opinion in allied states. We design and conduct a survey experiment in five Central–Eastern European states—Estonia, Latvia, Lithuania, Poland, and Romania—in March 2022. Set against the backdrop of Russia’s invasion of Ukraine, this experiment asked respondents to evaluate four types of reassurance strategies, each a critical tool in US crisis response policy: military deployments, diplomatic summitry, economic sanctions, and public reaffirmations of security guarantees. The international security literature typically values capabilities for their deterrence and reassurance benefits, while largely dismissing public reaffirmations as “cheap talk” and economic sanctions as being ineffective. Yet we find preferences for the use of economic sanctions and public statements as reassurance strategies during crises, in part because these approaches help states manage escalation risks.

Sorting Through Cheap Talk: Theory and Evidence from a Labor Market

Sorting Through Cheap Talk: Theory and Evidence from a Labor Market

Sorting Through Cheap Talk: Theory and Evidence from a Labor Market

Sorting Through Cheap Talk: Theory and Evidence from a Labor Market

How Moral Beliefs Influence Collective Violence. Evidence From Lynching in Mexico

How do moral beliefs influence favorability to collective violence? In this article, I argue that, first, moral beliefs are influential depending on their salience, as harm avoidance is a common moral concern. The more accessible moral beliefs in decision-making, the more they restrain harmful behavior. Second, moral beliefs are influential depending on their content. Group-oriented moral beliefs can overturn the harm avoidance principle and motivate individuals to favor collective violence. Analysis is based on a representative survey in Mexico City and focuses on a proximate form of collective violence, locally called lynching. Findings support both logics of moral influence. Experimentally induced moral salience reduces favorability to lynching, and group-oriented moral beliefs are related to more favorability. Against existing theories that downplay the relevance of morality and present it as cheap talk, these findings demonstrate how moral beliefs can both restrain and motivate collective violence.

Emotion regulation and cheap talk as signaling strategies: Evidence from crowdfunding for Ukraine

Crowdfunding, as enabled by donors worldwide, has played a critical role in financially supporting military forces, NGOs, humanitarian groups, and civilians in the Ukraine-Russia Crisis. This global mobilization underscores the evolving dynamics in the modern geopolitical landscape, emphasizing the transformative power of online collective action in fundraising and organizing. This study draws on signaling theory to pinpoint success indicators in crowdfunding for Ukraine projects on GoFundMe. Recognized as an effective explanatory framework, signaling theory is used as it bridges fundraising tactics with donation behavior in crowdfunding contexts. Particularly, the research examines how emotions and semantics contributed to (or hindered) fundraising success through sentiment analysis, topic modeling, and paragraph vectors. Findings revealed that trust showcased in fundraisers’ texts and videos amplified donations. Conversely, expressions of sadness deterred donations. Furthermore, the strategic deployment of an anti-Putin narrative notably enhanced fundraising results, but this strategy was way more likely to be deployed by fundraisers based in the United States. The distinct linguistic patterns of US campaigns were so pronounced that machine learning classifiers could predict the fundraiser’s origin (US vs. non-US) with 82% accuracy based solely on language. Overall, the study sheds light on the importance of emotion regulation and “cheap talk” as functional signaling strategies that facilitate value alignment. It provides new theoretical insights and methodological feasibility of examining how strategic communication affects financial outcomes in crowdfunding.