Cheap talk and bargaining power
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CREED-CEDEX-UEA Meeting 6 June 2008. Cheap Talk and Bargaining Power. Adrian de Groot Ruiz Sander Onderstal Theo Offerman. Outline. Sharing information in bargaining Relevant Situations Questions Model Equilibria Design Results Literature. Introduction.

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Cheap Talk and Bargaining Power

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CREED-CEDEX-UEA Meeting 6 June 2008

Cheap Talk and Bargaining Power

Adrian de Groot Ruiz

Sander Onderstal

Theo Offerman


Outline

  • Sharing information in bargaining

  • Relevant Situations

  • Questions

  • Model

  • Equilibria

  • Design

  • Results

  • Literature


Introduction

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


Model

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]): ui(δ)=0

60

60

uP = 60 – 0.4*p

uC = 60 – |p – v|

0

0

v

120

120


Model

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


Theory

60

120

0

60

Cheap Talk Equilibria


Theory

Chooser stronger => More Information Transmission

60

30

120

0

30

90


Theory

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

60

30

120

0

30

40


Experiment

Experimental Design


Experiment

Experimental Procedure

  • Random matching, fixed roles

  • 50 periods per session

  • 10 subjects per matching group

  • Six matching groups per treatment

  • Social History


Experiment

Results: Values

Suggestions

Proposals

Acceptance rates

v

v

v

None: uP(δ)=0 uC(δ)=0Chooser: uP(δ)=0 uC(δ)=30Both: uP(δ)=30 uC(δ)=30


Experiment

Results: Values


Experiment

Results: Variance

Var(Suggestions|v)

Var(Proposals|v)

Var(Acceptance|v)

v

v

v

None: uP(δ)=0 uC(δ)=0Chooser: uP(δ)=0 uC(δ)=30Both: uP(δ)=30 uC(δ)=30


Experiment

Results: Distribution Proposals

None ChooserBoth


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

Literature

  • Crawford & Sobel (Econometrica, 1982)

  • Matthews (QJE, 1989)

  • Farrell (Games, 1993)

  • Dickhout (JET, 1995)

  • Cai/Wang (Games, 2006)


Questions & Suggestions


End


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