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

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

3. 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

4. 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

5. 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

6. 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)=0 60 0 120 Model 60 0 120v u P = 60 – 0.4*p u C = 60 – |p – v|

7. 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

8. Cheap Talk Equilibria Theory 60 120 0 60

9. Theory 60 120 0 90 Chooser stronger => More Information Transmission 30

10. Proposer stronger => - Less information transmission - Less Stability (neologism) Theory 60 120 0 30 40 30

11. 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

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

13. 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

14. Results: Values Experiment TreatmentMessageProposalAcceptPayoff1Payoff2 None103440.893834 Chooser96560.903448 Both86350.543940 None-Chooser0.080.00390.740.00370.0039 None-Both0.0040.00390.003610.0039 Chooser-Both0.0050.00390.00360.00380.0039

15. 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

16. Results: Distribution Proposals None ChooserBoth Experiment

17. 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.

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

19. Questions & Suggestions

20. End