On the Empirical Content of Cheap-Talk Signaling: An Application to Bargaining

We outline a framework for the empirical analysis of signaling games based on three features: sorting, incentive compatibility, and beliefs. We apply it to document cheap-talk signaling in the use of round-number offers during negotiations. Using millions of online bargaining interactions, we show t...

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Bibliographic Details
Published in:The Journal of political economy 2019-08, Vol.127 (4), p.1599-1628
Main Authors: Backus, Matthew, Blake, Thomas, Tadelis, Steven
Format: Article
Language:English
Subjects:
Bargaining
Economic models
Economic theory
Games
Political economy
Signaling
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Summary:We outline a framework for the empirical analysis of signaling games based on three features: sorting, incentive compatibility, and beliefs. We apply it to document cheap-talk signaling in the use of round-number offers during negotiations. Using millions of online bargaining interactions, we show that items listed at multiples of $100 receive offers that are 8–12 percent lower but are 15–25 percent more likely to sell, demonstrating the trade-off requisite for incentive compatibility. Those same sellers are more likely to accept a similar offer, and buyers are more likely to investigate their listings, consistent with seller sorting and buyer belief updating.
ISSN:0022-3808
1537-534X
DOI:10.1086/701699