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Cheap Talk and Bargaining Power

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

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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. Theory 60 120 0 60 Cheap Talk Equilibria

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

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

  11. Experiment Experimental Design

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

  13. 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

  14. Experiment Results: Values

  15. 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

  16. Experiment Results: Distribution Proposals None Chooser Both

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

  19. Questions & Suggestions

  20. End

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