Cheap Talk and Bargaining Power Adrian de Groot Ruiz Sander Onderstal Theo Offerman CREED-CEDEX-UEA Meeting 6 June 2008

Outline Sharing information in bargaining Relevant Situations Questions Model Equilibria Design Results Literature

Consider the Following Situations: Potential Merger –Merging firms send proposal to Market Authority –Merging firms prefer as large a firm as possible –Exact preference of Authority are unknown –Outside option is no merger Legal dispute –Father and Mother fight over Custody –Mother wants the children all day –Father’s preferences are unknown –Lawyers try to find an agreement –Outside option is costly trial Introduction

Sharing information in Bargaining Incentive to share: efficiency – “common goals” – Efficiency Incentive not to share: strategic –Vagueness –Deception How much information can be transmitted? –Crawford/Sobel, Matthews, Dickhaut, Cai/Wang Introduction

Questions If you become more powerful, your incentives and credibility may change. What is the effect of a neologism on the evolution of bargaining-language? –Farrell Introduction

Model: Chooser and Proposer Bargain over policy p in [0, 120] Ideal policy Proposer is 0 Ideal policy Chooser is private v ~ U[0,120] Status quo δ (not in [0, 120]): u i (δ)= Model v u P = 60 – 0.4*p u C = 60 – |p – v|

Game Tree Nature informs Chooser of value in [0,120] Chooser sends suggestion s in [0,120] Proposer makes proposal x in [0, 120] Chooser accepts or rejects proposal x Model

Cheap Talk Equilibria Theory

Theory Chooser stronger => More Information Transmission 30

Proposer stronger => - Less information transmission - Less Stability (neologism) Theory

Experimental Design Experiment Treatment 1Noneu P (δ)=0 u C (δ)=0 Treatment 2Chooseru P (δ)=0 u C (δ)=30 Treatment 3Bothu P (δ)=30 u C (δ)=30

Experimental Procedure Experiment Random matching, fixed roles 50 periods per session 10 subjects per matching group Six matching groups per treatment Social History

Results: Values SuggestionsProposals Acceptance rates None: u P (δ)=0 u C (δ)=0 Chooser: u P (δ)=0 u C (δ)=30 Both: u P (δ)=30 u C (δ)=30 Experiment vvv

Results: Values Experiment TreatmentMessageProposalAcceptPayoff1Payoff2 None Chooser Both None-Chooser None-Both Chooser-Both

Results: Variance Var(Suggestions|v)Var(Proposals|v) Var(Acceptance|v) None: u P (δ)=0 u C (δ)=0 Chooser: u P (δ)=0 u C (δ)=30 Both: u P (δ)=30 u C (δ)=30 Experiment vvv

Results: Distribution Proposals None ChooserBoth Experiment

Preliminary Conclusions Experiments show mix between equilibrium behavior and naive behavior. Chooser stronger implies more information transmission. Proposer stronger implies less information transmission and more instability. Neologisms cause instability.

Literature Crawford & Sobel (Econometrica, 1982) Matthews (QJE, 1989) Farrell (Games, 1993) Dickhout (JET, 1995) Cai/Wang (Games, 2006) Literature

Questions & Suggestions

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