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Sellers may display unreasonably high prices (in high-cost oriented contexts) that are never accepted or would surely be discounted through bilateral bargaining. Conversely, general or vague prices with incredible appeals may be advertised (in low-cost oriented settings) as a range or for a category but not tied to specific items. Nevertheless, these seemingly irrelevant or unbinding prices can affect buyer behavior and bargaining outcome. This paper presents a new explanation for these puzzling phenomena. We propose that advertised reference prices can be a strategic tool to communicate privately known seller costs to influence optimal buyer strategy to search value information. We show that cheap-talk communication via uncommitted prices can be endogenously credible, because optimal buyer search strategy can be imperfectly aligned with seller preference. In particular, a high-cost seller may prefer the buyer to acquire information in a more cautious manner (i.e., less willing to stop at good news but more eager to quit at bad news) than a low-cost seller, which may coincide with the buyer's optimal search strategy. We demonstrate that endogenous buyer search can serve as a two-way discipline to regulate both high- and low-cost sellers' incentive for deception, which thus can sustain credible communication for high-cost and/or low-cost oriented settings.

We consider a large decentralized freelance platform where buyers with private information about their quality preferences are matched with freelancers that differ in quality. When posting their job requests, buyers can report their quality preferences via cheap talk, which influences freelancers’ application and pricing strategies. By exaggerating one’s quality preference, a buyer attracts not only more applications from freelancers, but also those with higher quality, at the cost of a higher expected price. We find that it is always an equilibrium for the buyers to report their quality preferences truthfully when they cannot renegotiate with freelancers on their asking prices after getting matched. On the other hand, when postmatch renegotiation is allowed and buyers have relatively high bargaining power, low-type buyers may strategically exaggerate their quality preferences, and subsequently after getting matched, costly signal their true type and bargain for lower prices. From a platform design perspective, our analysis implies that the option of renegotiation, designed to facilitate postmatch information transmission, may backfire by giving rise to buyers’ prematch opportunistic behaviors of information distortion. This paper was accepted by Joshua Gans, business strategy.

The trust on network of Chinese public database is involved many factors in sociology, economics, technology, social psychology and so on, which resulted in the complexity of trust mechanism. The construction of trust mechanism plays a decisive role in public data governance via theoretical analysis. In the view of system science, trust is the key feedback control variable of data exchanging in the information structure and function of social economic system, while the emergence variable, not individual variable. In other words, the trust is unexpressed individually or locally, missed the principle of reductionism and belonging to the category of systems. The evolution of the structure and function of the trust in the public data trust game is a typical complex system dynamics process. By systematic approach, this research provides an overall framework for trust mechanisms in the Chinese public database network to reach trust consistency, thereby, improving the quality of Chinese public data products and the credibility of data authority in public sector. The problem of control is studied which betrayal is restricted to limit size of belief, in the viewpoints of public sector bureaucratic behavior, the data trust game and the trust psychological mechanism. One of proposed Byzantine general algorithm is provide for public data game with the "cheap talk", and the trust dynamics equations is set up on the trust overlay network of hierarchical public data game, while the economic and sociological explains of the model conditions and model solving are presented for us to understand this algorithm and model.

Almost 60% of mergers and acquisitions are concluded with the aid of multiple third-party advisors. While there has been work on the impact of advisors, the theoretical and empirical implications of using multiple advisors remain unclear. Using insights from the "cheap talk" literature, we derive hypotheses on the impact of multiple advisors. Expanding upon this, we then consider the moderating impact of advisor reputation/quality and deal timing (in terms of merger wave periods vs. non-merger wave periods), as factors that both the cheap talk and the literature on single advisors highlight as relevant. We test our hypotheses using a sample of 10,544 large US acquisitions, and evaluate the impact of advisors using an event study and abnormal returns. Our results support a value-creating role for single advisors—we find that deals with single advisors create a higher expectation of value-creation—but find little support for the use of multiple advisors. Furthermore, we show that the moderating effect of advisor reputation, and deal timing, are contingent on the number of advisors. In doing so, we make a number of academic and practical contributions to the discussion of advisors in mergers and acquisitions.

We experimentally examine the role of private information and communication in a public goods environment with uncertain returns. We consider a public goods game in which the Marginal Per Capita Return (MPCR) is either high or low. Before contributing, three players observe private signals correlated with the true MPCR and then send cheap talk messages to one another. There are social gains from truthful communication, but a private incentive to exaggerate. We compare treatments with and without cheap talk, finding that messages are largely truthful and influence contribution decisions. In further treatments, we increase the incentive to exaggerate and find reduced truthfulness and smaller gains from communication Key Words: public goods, experiment, information, cheap talk, game theory, cooperation

This study examines how a CEO’s sensitivity affects information transmission from multiple unit managers when they communicate strategically during decision-making for technology investment. We develop a simple cheap talk model comprising one CEO and K unit managers, wherein the CEO makes a decision to maximize the units’ profit after the managers reveal their preference for the decision through cheap talk. We demonstrate that the expected total profit improves when sensitivity to the opinion of a manager whose expected preference is moderate among all managers increases. The driving force of the results is termed as alignment effect; increasing sensitivity to a moderate opinion decreases the difference between the expected CEO’s decision and the managers’ ideals. Furthermore, some implications on the decision-making process in technology investment within firms are discussed.

I formalize the role of the self-signaling condition in guaranteeing coordination for pre-play cheap talk games with one-sided communication. I model a preexisting common language by assuming that the Receiver either ignores or follows cheap talk recommendations, but never inverts them. This assumption creates asymmetry between messages, which captures the essence of a common language. It does not rule out any outcome at hand in that every equilibrium outcome of the original game remains an equilibrium outcome in this transformed game. However, applying iterative admissibility to the transformed game yields sharp predictions. If the stage game satisfies a certain self-signaling condition, then the Sender gets her Stackelberg payoff in every iteratively admissible outcome. On the other hand, if the stage game violates a weaker self-signaling condition, miscoordination can happen in an iteratively admissible outcome.

We consider a situation in which a decision-maker gathers information from imperfectly informed experts, receiving coarse signals about a uniform state of the world. Private information is (conditionally) correlated across players, and communication is cheap talk. We show that with two experts correlation unambiguously tightens the conditions on preferences for a truth-telling equilibrium. However, with multiple experts the effect of correlation on the incentives to report information truthfully can be non-monotonic: while little and large levels of correlation hinder truth-telling, intermediate levels may discipline experts’ equilibrium behaviour and foster truthful communication. We discuss the implications of our results for the political discussion in the presence of ‘selective exposure' to media, where similarity in preferences comes with higher correlation, and a trade-off between truth-telling incentives and informational content arises.

We analyze a manager''s choice of precision of the information in a repeated cheap talk game under which the manager can excuse his lie by blaming the poor quality of the information system. In this setting, the manager can protect his reputation for the future period if the precision of information is imperfect, providing the manager with incentives to choose the poor quality of information system. However, the analyses show that even though the manager can excuse his lie relying on the imperfect precision, he finally selects perfect precision in most cases. The only exception is when he cannot publically determine the precision and he knows that his interest is not aligned with investor''s. Even in this case, he randomizes his choice of information quality between perfect and imperfect precision. Otherwise, the manager chooses the perfect precision of information system. Our theoretical model provides important insights into why managers provide truthful or precise disclosures in most cases even if they are able to lie. In addition, our findings explain why they sometimes deviate from their normal practice and provide inaccurate, biased, or imprecise forecasts.

This essay raises the question whether citizens in the digital age can learn from how credibility is treated in international negotiations. Negotiators face problems both in attempting to send credible signals and in making credibility assessments of received signals. Several studies, starting with Schelling’s seminal analysis of commitments, indicate that credible signals are those that are somehow costly to the sender. Contributions to our understanding of how recipients make credibility assessments include Jervis’s distinction between signals (with no inherent credibility) and indices (believed to be untainted by deception). The most general conclusion emerging from existing research is that there is no definitive, infallible solution to the problem of credibility, insofar as deception and misperception are intrinsic to all signaling systems. Today’s unfortunate combination of limited awareness of credibility problems, on the one hand, and technological advances facilitating deception, on the other, calls for intensified education as well as multidisciplinary research.

Many international development organizations (IDOs) have officially mandated anti-corruption criteria for aid selectivity. Substantial debate remains over whether corruption deters aid and whether anti-corruption rules are effectively implemented. We argue that the extent to which both corruption and anti-corruption mandates factor into IDO allocation depends on the composition of the donors. Using existing data on corruption alongside newly collected data on anti-corruption mandates, we demonstrate that organizations composed of corrupt donors are just as likely to adopt, but less likely to enforce, anti-corruption mandates. Organizations composed of less corrupt donors, by contrast, tend to divert aid away from corrupt states, with or without formal anti-corruption rules in place. The findings have implications for the debate over whether international efforts to institutionalize “good governance” standards are sincere or cheap talk, whether multilateral strategies are in fact less politicized than bilateral aid allocation strategies, and whether international organizations should be inclusive, open to membership by many or even all states, including those with dubious track records.

Identity, reputation, and culture represent ways to understand why organizations with similar structures and memberships nevertheless behave differently. While a large body of work has advanced our understanding of the effects of formal institutional details such as delegation, hierarchy, transparency, and oversight on organizational behavior, less attention has been paid to informal institutional details such as shared mission, professionalism, and other bases of organizational identity. We present a theory of organizational decision-making that incorporates organizational identity in the form of "mission." The degree to which individuals will be motivated to adopt their organization's mission will be influenced by both the preferences of others within, and the structure of, the organization. Thus, we provide a theory of endogenous preferences within organizations that incorporates features of both formal and informal institutions.

We study a model of cheap talk with one substantive assumption: The sender's preferences are state independent. Our main observation is that such a sender gains credibility by degrading self‐serving information. Using this observation, we examine the sender's benefits from communication, assess the value of commitment, and explicitly solve for sender‐optimal equilibria in three examples. A key result is a geometric characterization of the value of cheap talk, described by the quasiconcave envelope of the sender's value function.

By reading the existing literature and combining the Chinese reality, based on a literature review of the research results on the relationship between election commitments and election behaviors, this paper summarizes the existing academic achievements and finds that academic discussion on the relationship between election behavior and election commitment forms three perspectives: just a cheap talk view, determining view and neutral view.

In a cheap‐talk setting where the conflict of interest between sender and receiver is determined endogenously by the choice of parameters θ i for each agent i, conditions are provided that determine the sign of each agent's inverse demand for θ without assuming that the most informative equilibrium will necessarily be played in the cheap talk game. For two popular functional forms of payoffs, we derive analytically tractable approximations for agent i's demand for θ. In an application where the θi's are purchased on a competitive market, we provide conditions for a competitive equilibrium to feature maximal information transmission. In a principal–agent application where the agent's θ is set by the principal, our results show that information transmission will be partial. We consider extensions where: (1) the θ's are acquired covertly rather than overtly and (2) the θ's are traded after the sender has received the information.

•Forward guidance can be cheap talk in an infinitely repeated game with the public.•Asymmetric information is necessary for cheap talk to be useful.•The central bank can build credibility over time to make cheap talk credible.•When to use forward guidance instead of general transparency remains unclear.•Adding a lower bound on interest rates does not change the main conclusions.

In a model with cheap talk, employers can send messages about their willingness to pay for higher ability workers, which job-seekers can use to direct their search and tailor their wage bid. Introducing such messages leads—under certain conditions—to an informative separating equilibrium which affects the number of applications, types of applications, and wage bids across firms. This model is used to interpret an experiment conducted in a large online labor market: employers were given the opportunity to state their relative willingness to pay for more experienced workers, and workers can easily condition their search on this information. Preferences were collected for all employers, but only treated employers had their signal revealed to job-seekers. In response to revelation of the cheap talk signal, job-seekers targeted their applications to employers of the right “type” and they tailored their wage bids, affecting who was matched to whom and at what wage. The treatment increased measures of match quality through better sorting, illustrating the power of cheap talk to improve market outcomes.

This paper studies the mechanisms which motivate managers to engage in cheap talk and attract the market's attention in a credible way. We consider stock split announcements, voluntary earnings forecasts, and press releases issued by firms to the media as proxies for managerial cheap talk. We show that: (a) managerial performance-related pay contracts incentivize executives to attract attention; (b) analysts increase their coverage of firms following cheap talk; and (c) chief executive officers are punished for attracting attention when market prices do not increase following cheap talk. The results are stronger for firms which are most in need of attention.

This study investigates the information content of Management Discussion and Analysis (MD&A) reports of listed Chinese companies. We develop a Chinese word dictionary and measure the tones of MD&As. Our results indicate that tone is positively associated with future earnings and is particularly useful when a firm's future prospect is uncertain, accounting information is difficult to understand, or board monitoring is strong. Further analyses show that tone also predicts future cash flow, future sales growth, market reactions, analysts’ revisions, and institutional investors’ shareholdings. Together, we provide robust evidence that in emerging markets such as China, management tone conveys valuable information beyond cheap talk.

I study the information content of management voluntary disclosures disciplined by shareholder litigation. I model the litigation mechanism in which legal liabilities are based on the damages that shareholders suffer from buying a stock at an inflated price. I find that management does not fully reveal private information in equilibrium. Instead, their disclosures reveal only a range in which their private information lies. Thus, the precision of information is, to some extent, lost. Notably, increasing the severity of legal liability does not always reduce the loss of precision. In fact, when the legal liability reaches a certain level, more severe legal liability will result in less precise disclosures. I also find that good news and bad news have different precision. Specifically, good news is more precise than is bad news when legal liabilities are high, and bad news is more precise than is good news when legal liabilities are low.

We study cheap talk by firms and responses by their consumers, focusing on unverifiable promises of charitable donations on eBay during 2005–2006. Cheap talk listings have lower sales probabilities but sell at higher prices when successful. The negative relationship between cheap talk and sales is concentrated in the months following Hurricane Katrina, a time when verifiable and unverifiable charity listings increased dramatically. Finally, we show that cheap talk sellers have lower quality ratings than those making verifiable donations. Our results suggest that buyers ( justifiably) avoid cheap talk listings when credible quality signals are available, thus limiting the extent of cheap talk. (JEL D12, D82, D83, L15, L31, M31)

Incomplete information exacerbates the problems inherent in collective action. Participants cannot efficiently coordinate their actions if they do not know each other’s preferences. I investigate when ordinary communication, or cheap talk, may resolve mutual uncertainty in collective action problems. I find that the efficacy of communication depends critically on the relationship between contributions and the value of the joint project. The incentive barriers to honesty are highest when every contribution increases the project’s value. Participants then have a strict incentive to say whatever would induce others to contribute the most, so cheap talk lacks credibility. By contrast, when contributions may be marginally worthless, such as when the project has no value unless contributions hit a certain threshold, communication may help participants avoid wasted effort. Using these findings, I identify which collective action problems in politics might benefit from communication and which require more expensive solutions to overcome uncertainty.

A theory is developed to explain how sellers can effectively collude by coordinating on list prices (or surcharges), while leaving sellers to set their final prices. List prices are interpreted to be cheap talk announcements about cost information unknown to buyers. Buyers use those announcements to decide whom to invite to their procurement auction and the reserve price to set. By coordinating on a high list price to signal high cost, sellers produce supracompetitive prices by inducing buyers to be less aggressive, as reflected in a higher reserve price. We show that collusion can raise social welfare.

A decision maker repeatedly asks an adviser for advice. The adviser is either competent or incompetent and knows his type privately. His preferences are not perfectly aligned with the decision maker's preferences. Over time, the decision maker learns about the adviser's type and will fire him if the adviser is likely to be incompetent. If the adviser's reputation for competence improves, he is less likely to be fired for incompetence but this makes pushing his own agenda more attractive to him. Consequently, very competent advisers are also fired with positive probability because they are tempted to pursue their own goals. The quality of advice can be highest if the adviser's competence is uncertain.

PurposeThe purpose of this paper is to investigate whether truthful information sharing can be achieved via informal cheap talk in a competitive setting, and how carbon emission constraint and information-sharing modes (no information sharing, partial information sharing and public information sharing) interact with each other under cap-and-trade regulation.Design/methodology/approachThis paper establishes an emission-dependent supply chain consisting of a manufacturer, an incumbent retailer who has superior demand information and a new entrant retailer. The manufacturer abates carbon emissions under the pressures of government environmental regulation and consumers’ eco-friendly concern. The research formulates a multistage game to explore every party’s decision and the implications of information-sharing modes.FindingsThe results show that truthful information sharing can be achieved when the manufacturer decides both the wholesale price and carbon emission abatement. The results also show that the incumbent retailer’s information-sharing decision highly depends on the manufacturer’s capacity in abating carbon emissions and the demand uncertainty.Originality/valueThe research adds value to information management and sustainable production literature. This work emphasizes the interaction between the information flow and material flow. Not only it investigates the factors that affect information-sharing modes from a new point of view when considering carbon emission constraint, but also provides operational strategies for manufacturers to make more profit when facing asymmetric information and emission regulation.

We examine an analyst with career concerns making cheap talk recommendations to a sequence of traders, each of whom possesses private information concerning the analyst's ability. The recommendations of the analyst influence asset prices that are then used to evaluate the analyst. An endogeneity problem thus arises. In particular, if the reputation of the analyst is sufficiently high then an incompetent but strategic analyst is able to momentarily hide her type. An equilibrium in which the market eventually learns the analyst type always exists. However, under some conditions, an equilibrium also exists in which the incompetent analyst is able to hide her type forever.

In cheap talk games where senders' accuracy of information depend on their background knowledge, a sender with image concerns may want to signal that she is knowledgeable despite having material incentives to lie. These image benefits may, in turn, depend on the type of knowledge and its perceived social status. Theoretically, we show that when some senders care sufficiently about their image, there is both a non-informative babbling equilibrium, and a separating equilibrium, in which the average sender's message is informative and receivers always follow. In a laboratory experiment, we vary the social status of knowledge (1) by providing senders with multiple-choice questions on either (a) broadsheet topics (general knowledge) or (b) tabloid topics, and (2) by systematically modifying the degree of difficulty. We find truth-telling rates to be significantly higher when senders can signal high-status knowledge.

We present a new framework for analyzing defamation liability that serves both to clarify and complicate understandings of the law’s consequences for speakers, victims, and the marketplace of ideas. In addition to the familiar deterrence and chilling effects, we show how defamation liability can generate a “warming effect,” making statements more credible and potentially raising both the quality and quantity of speech. We also explain how a more plaintiff-friendly liability regime may exacerbate harms to defamation victims. We end by considering the possibility of “self-tailored” defamation law, with victims or speakers selecting the defamation liability regime that applies to them.

Effective education requires strategic consideration. If students doubt the motives of teachers and advisors, then students rationally ignore the advice they receive. Valuable information is lost in such bad communication outcomes and, consequently, the quality of education suffers. In this paper, we argue that an advisor's sacrifice is an essential virtue of a good advisor for efficient communication between an advisor and a student. We model the relation between them as a signaling game. We find a separating equilibrium in which a good advisor (whose objective function truly coincides with the student's own objective function) makes a costly sacrifice that causes the student to believe what the advisor says, while a non‐good advisor (whose objective does not coincide with the student's) chooses not to make the costly sacrifice and, consequently, the student completely ignores the advisor. In fact, it turns out to be the unique equilibrium that survives the Intuitive Criterion. The model demonstrates the importance of making students aware of those aspects of the advisor's objectives that students may not realize are closely aligned with their own (e.g., the extent to which an advisor cares about students' academic and professional trajectories as evaluated by students themselves).

The debate over how firm stakeholder engagement is tied to preserving shareholder wealth has received growing attention in recent years, especially in the wake of the COVID-19 crisis. Against this backdrop, we examine the relation between corporate social responsibility (CSR) and stock market returns during the COVID-19 pandemic-induced market crash and the post-crash recovery. Using a sample of 1750 U.S. firms and two major sources of CSR ratings, we find no evidence that CSR affected stock returns during the crash period. This result is robust to various sensitivity tests. In additional cross-sectional analysis, we find some supporting evidence, albeit weak, that the relation between CSR and stock returns during the pandemic-related crisis is more positive when CSR is congruent with a firm's institutional environment. We also find that Business Roundtable companies, which committed to protecting stakeholder interests prior to the pandemic, do not outperform during the pandemic crisis. We conclude that pre-crisis CSR is not effective at shielding shareholder wealth from the adverse effects of a crisis, suggesting a potential disconnect between firms' CSR orientation (ratings) and actual actions. Our evidence suggests that investors can distinguish between genuine CSR and firms engaging in cheap talk.

Consumers can decide whether to acquire more information about their valuations prior to purchase. In this paper, we examine pricing and advertising strategies when consumers can engage in prepurchase information acquisition. We show that consumer information acquisition can increase valuation heterogeneity and undermine a firm’s ability to extract consumer surplus. As a result, interestingly, a higher product quality can exert a nonmonotonic impact on equilibrium information acquisition, hurt firm profitability, and lead to lower consumer surplus. We also demonstrate that prepurchase information acquisition can be an endogenous mechanism to enable credible advertising in a cheap-talk setting. We show that quality claims in advertisements can be informative even when the firm can freely misrepresent its advertising message. Informative advertising can arise because a higher perceived quality can not only increase consumers’ expected value, but it also induces more information acquisition and thus hurts the firm’s ability to extract consumer surplus. This novel explanation for the credibility of cheap-talk advertising is distinguished from those identified in the literature (e.g., matching between firm types and heterogenous consumers, restrictive communication on multidimensional attributes). Moreover, we show that a higher quality can soften competition by inducing more information acquisition, thus benefiting the rival firm’s profitability. This paper was accepted by Matthew Shum, marketing.

I study how an informed manager can benefit from cheap-talk communication by strategically forming diverse groups of uninformed, heterogenous workers. Optimal grouping, or partition, of workers trades off the benefit from gaining credibility through having greater diversity in each group against the cost from the inability to tailor communication among workers in the same group. Public and private communication are restrictions on the partitions the manager can adopt, and the manager prefers semi-public communication whenever there is a possibility to benefit from differently diverse groups of workers. I show that it is optimal for the manager to separate workers who need to be persuaded from those that do not, and I derive further properties of optimal partitions when workers are single minded and when workers have preferences over a spectrum of project types.

Sanctions restrict cross-border interactions and therefore, not only put political and economic pressure on the target country, but also adversely affect the sender country. This paper examines the effect of financial sanctions on the country imposing them. We analyze the business responses of German non-financial entities to the imposition of sanctions on 23 countries over the period from 1999 through 2014. Examining highly disaggregated, monthly data from the German balance of payments statistics, we find four main results. First, German financial activities with sanctioned countries are reduced after the imposition of sanctions. Second, firms doing business with sanctioned countries tend to be disproportionately large, often having alternative business opportunities. Third, firms affected by sanctions expand their activities with non-sanctioned countries, some of which display close trade ties to the sanctioned country. Fourth, we find no effect of sanctions on broader measures of firm performance such as employment or total sales. Overall, we conclude that the economic costs of financial sanctions to the sender country are limited.

In a model with cheap talk, employers can send messages about their willingness to pay for higher ability workers, which job-seekers can use to direct their search and tailor their wage bid. Introducing such messages leads—under certain conditions—to an informative separating equilibrium which affects the number of applications, types of applications, and wage bids across firms. This model is used to interpret an experiment conducted in a large online labor market: employers were given the opportunity to state their relative willingness to pay for more experienced workers, and workers can easily condition their search on this information. Preferences were collected for all employers, but only treated employers had their signal revealed to job-seekers. In response to revelation of the cheap talk signal, job-seekers targeted their applications to employers of the right “type” and they tailored their wage bids, affecting who was matched to whom and at what wage. The treatment increased measures of match quality through better sorting, illustrating the power of cheap talk to improve market outcomes. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Disclosure of climate-related financial risks greatly helps investors assess companies' preparedness for climate change. Voluntary disclosures such as those based on the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD) are being hailed as an effective measure for better climate risk management. We ask whether this expectation is justified. We do so with the help of a deep neural language model, which we christen ClimateBert. We train ClimateBert on thousands of sentences related to climate-risk disclosures aligned with the TCFD recommendations. In analyzing the disclosures of TCFD-supporting firms, ClimateBert comes to the sobering conclusion that the firms' TCFD support is mostly cheap talk and that firms cherry-pick to report primarily non-material climate risk information. From our analysis, we conclude that the only way out of this dilemma is to turn voluntary reporting into regulatory disclosures.

This chapter outlines the essential topics for developing and testing a questionnaire for a discrete choice experiment survey. It addresses issues such as the description of the environmental good, pretesting of the survey, incentive compatibility, consequentiality or mitigation of hypothetical bias. For the latter, cheap talk scripts, opt-out reminders or an oath script are discussed. Moreover, the use of instructional choice sets, the identification of protest responses and strategic bidders are considered. Finally, issues related to the payment vehicle and the cost vector design are the subject of this section.

We examine a persuasion game where concerns about future credibility are the sole source of commitment. A long-run Sender plays a dynamic cheap talk game against short-run Receivers. Even with perfect monitoring, long-run incentives do not substitute for full commitment at the stage game. We show how a simple mechanism that we call a 'coin and cup' can better harness long-run incentives to retrieve payoffs identical to those under full commitment. We also examine how a mediator can approximate these payoff even when monitoring is imperfect. Neither mechanism affects play in the one-shot game. Finally, we discuss both actual and potential applications of these two mechanisms within finance, e-commerce, media, lobbying, cryptography, and central banking. The Sender benefits from better persuasion; Receivers can either benefit or suffer.

Why do interest groups lobby allied legislators if they already agree? One possibility is that allies are intermediaries who help persuade unconvinced legislators. To study the role and value of intermediaries, I develop a formal model of persuasive lobbying where interest groups use public cheap talk and provide verifiable information to a strategically selected coalition of legislators. Interest groups face a trade-off: Lobbying aligned legislators is advantageous as they are more willing to endorse the group's preferred policy, but those who are too aligned cannot persuade a majority of their peers. The model illustrates how intermediaries are especially valuable if interest groups cannot persuade a majority themselves. Counter to previous work, the results demonstrate how a legislature's ideological composition determines the use of intermediaries. Groups may lobby intermediaries even if access to legislators is free and unrestricted.

Rising states face great difficulty credibly communicating benign intentions, due to strong incentives for hostile risers to misrepresent themselves. However, the literature on power shifts and reassurance focuses on bilateral interactions between a rising and declining state. This article presents a model showing that with more than one audience, rising states can communicate their intentions through simple, costless statements. In particular, if the preferences of the receivers are sufficiently divergent, the rising sender cannot simultaneously send cooperative public signals to both parties in order to avoid a balancing response. This reduces the riser's incentive to misrepresent its preferences, and lends credibility to its public statements of its intentions. The credibility of these signals is enhanced to the extent that they align with the preferences of the less-powerful receiver. The theory is illustrated by a case study of the Open Door Notes and applied to contemporary China's reassurance of Russia.

We consider a two-echelon supply chain consisting of one capacity-constrained supplier and two Cournot-competitive retailers. The incumbent retailer has private demand information and takes strategic information sharing to maximize its expected profit. The supplier carries out capacity allocation strategy when the capacity cannot satisfy both retailers’ total order quantity. We model three scenarios of information sharing: (1) no member is informed; (2) only the entrant retailer is informed; and (3) both the supplier and entrant retailer are informed. We characterize the conditions under which information sharing may benefit or hurt the supply chain and different members and meaningful information sharing is achieved via “cheap talk”. Compared with no information sharing, when only the entrant retailer is informed, the incumbent retailer always has incentive to deflate its demand information to make the entrant retailer order less. Both retailers cannot achieve meaningful information sharing. When the supplier and entrant retailer both are informed, the incumbent retailer faces a trade-off between the desire to receive more products and the fear of intense competition and high wholesale price. The meaningful information sharing is achieved and all members are benefitted. The numerical examples verify theoretical results.

We show that experience good sellers facing myopic buyers can solve the inherent moral hazard problem by communicating their observation of quality before trade, provided that communication is part of their public track record. Such cheap-talk communication, if trusted, allows market prices to reflect the actual value created, thus providing an immediate reward for the seller's effort which complements the conventional, reputational incentives. Pre-trade communication achieves maximal efficiency when truthful and the full efficiency as the noise in the seller's observation vanishes. We fully characterize the conditions for communication to improve efficiency and the extent to which it does so.

In procurement auctions, suppliers' senior managers in charge of bidding often rely on advisors, such as project managers and technical specialists, to evaluate project costs. These advisors may be biased for inflating the costs due to agency or career concerns. We study the procurement agency's choice between sealed-bid static auctions and a dynamic Dutch auction in this setting. If the number of competing suppliers is small, static auctions result in lower expected costs than the Dutch auction. This ranking is reversed if procurement is sufficiently competitive. The Dutch auction is always more efficient regardless of the number of suppliers.

We investigate a novel continuous-time mechanism in a public-goods game. Within a fixed period, a clock ensures that contributions increase simultaneously for every player, and players can choose when to stop, while their actions are observed by others in real time. We show both theoretically and experimentally that this mechanism is very effective in improving the contribution. Three critical factors may play a role: cheap talk, incremental commitment, and the clock. We further decompose these factors and find that cheap talk alone is not effective, while incremental commitment and the clock each account for 60% and 40% of the total effect, respectively.

The debate over how firm stakeholder engagement is tied to preserving shareholder wealth has received growing attention in recent years, especially in the wake of the COVID-19 crisis. Against this backdrop, we examine the relation between corporate social responsibility (CSR) and stock market returns during the COVID-19 pandemic-induced market crash and the post-crash recovery. Using a sample of 1,750 U.S. firms and two major sources of CSR ratings, we find no evidence that CSR affected stock returns during the crash period. This result is robust to various sensitivity tests. In additional cross-sectional analysis, we find some supporting evidence, albeit weak, that the relation between CSR and stock returns during the pandemic-related crisis is more positive when CSR is congruent with a firm’s institutional environment. We also find that Business Roundtable companies, which committed to protecting stakeholder interests prior to the pandemic, do not outperform during the pandemic crisis. We conclude that pre-crisis CSR is not effective at shielding shareholder wealth from the adverse effects of a crisis, suggesting a potential disconnect between firms’ CSR orientation (ratings) and actual actions. Our evidence suggests that investors can distinguish between genuine CSR and firms engaging in cheap talk.

A central benefit of manufacturers’ sales reps is their ability to provide sellers with information about prospective buyers. Yet sales reps often selectively under-report this information, which is viewed as a major problem by sellers and academics alike. We feel this is only part of the story. Beyond their economic roles of passing along information, sales reps also manage social tensions between sellers and buyers that can threaten exchange. We show selective under-reporting can be beneficial to facilitate exchanges that would be impossible with fully truthful reports. We develop a game-theoretic model in a cheap-talk setting that adds the sales reps’ social role, and show when and which piece(s) of information sales reps will under-report to induce buyers and sellers to agree to a deal. We show this makes all three parties better off, generating a Pareto-improving “Selective Under-reporting” equilibrium. Our work suggests that half-truths aren’t always half-bad and can serve as an essential social lubricant for exchange. This broadens our understanding of the complexity of sales reps’ work and sales managers’ toolkit for managing under-reporting, and suggests new understandings of third parties’ roles in a world increasingly focused on information and big data.

In procurement auctions, bidders are usually better informed about technical, financial, or legal aspects of the goods and services procured. Therefore, the buyer may include a dialogue in the procurement procedure which enables the suppliers to reveal information that will help the buyer to better specify the terms of the contract. This paper addresses the question of the value added of letting the sourcing process consist of both an auction and a negotiation stage, theoretically and in a laboratory experiment. Our theoretical results suggest that in a setting where the buyer and the suppliers have aligned interests regarding the terms of the contract, allowing the winning supplier to communicate with the buyer after the auction is beneficial to the buyer compared to no communication and ex-ante communication. In a setting where the buyer and the winning supplier have misaligned interests regarding the terms, the buyer benefits from ex-ante communication relative to no communication and ex-post communication. Our experimental data provide strong evidence for the predictions in the aligned-interest setting. In the misaligned-interest setting, we do not observe significant differences between the three mechanisms. Our experimental findings offer several managerial implications for the appropriate design of sourcing processes.

Venture capital (VC) investors have been criticized for lax monitoring and for be- ing too “founder-friendly.” We identify an overlooked benefit of such behavior: entrepreneurs lie less to friendly VCs. The entrepreneur is privately informed about project success, enjoys private benefits of control, and recommends a project to the VC. The VC chooses the project and can intervene in the interim. The equilibrium features a “monitoring trap”: possible intervention leads the entrepreneur to lie, which prompts further intervention. However, both are better off if the VC commits to intervene less. We characterize implications for information acquisition, control rights, outside directors, and stage financing.

The current study investigates the usage of virtuous language in the management discussion and analysis (MD&A) section of SEC filings (10-K Form) and the prognostic power of such language for takeover performance. The sample under study, obtained from Bloomberg, is comprised of a large number of M&A deals from the United States that took place between January 2000 and October 2016. The empirical results, based on textual analysis, reveal that trust is negatively associated with long-term takeover performance, suggesting that managerial virtuous talk is, in practicality, an indication of lower post-acquisition gains for the acquirers in the long run. Furthermore, takeover returns are found to reflect textual information on trust with a delay, owing to general inattention and inability of investors to process soft cues inherent in textual content and to managers purposefully lulling investors to keep them from paying attention and identifying managerial misconduct. Quite interestingly, the significance of virtuous talk becomes more evident in the post-crisis period due to relatively higher uncertainty linked with evaluating such kind of deals on the basis of hard information alone. Finally, an inflated virtuous talk when coupled with pessimistic tone, the ability of managerial ‘good talk’ to create a trustworthy image and to distract investors reduces and the predictive power of managerial trust talk increases even more. Overall, it is concluded that managerial virtuous talk should not be regarded as a ‘cheap talk’. It is, in fact, very pertinent for predicting future takeover returns in the long run.

Decision makers are often accessible via a variety of communication channels (e.g. direct vs. intermediated, formal vs. informal, in-person vs. electronic, etc.), and the channel selected by an informed party can signal information about the sender's preferences. This paper uses a model of strategic communication to study how and why partisan and nonpartisan communication channels arise in organizations. Polarized organizations use only partisan channels and information transmission occurs primarily via cheap talk (channel selection). On the other hand, discussion equilibria include partisan channels for moderates, while those with important information instead use nonpartisan or discussion channels. Welfare analysis provides applications to various communication practices observed within organizations, particularly the near-ubiquitous use of both informal (e.g. gossip and rumors), and formal (e.g. business meetings or seminars) channels of communication in organizations and communities.