Friday, November 7, 2008

Cheap talk matters

Chatting and cheap talk in the office may have a impact of the social cohesion of the group, but does it matter amongst strangers? Stefano Demichelis and Jorgen Weibull take the example of the following game popularized by Aumann:


This is reminiscent of the prisoner's dilemma. If players can coordinate, c,c is the optimal outcome.But as both have the incentive to deviate, d,d is the Nash equilibrium. In other words, both say c but secretly think d. However, if they can send some message that has some meaning c,c can become a stable equilibrium.

This is different from a repeated game. There, if the same players keep interacting, they can build a reputation and c,c becomes, as experimental evidence shows, easily the equilibrium. The Demichelis and Weibull paper shows that small costs of lying can destabilize the d,d equilibrium as well. This may seem trivial, as adding such costs is equivalent to reducing the outcomes of strategy d. In the present context, however, the point is that pre-game messages ("cheap talk") are part
of the information set of actions. These messages may be complex, such as detailing what action one player takes in response to the other. But this cheap talk, even if cheap, may be effective in getting the better, cooperative outcome.


Anonymous said...

Perhaps my brain is not working, but 9>8 so where is the incentive to deviate? For a given player, shouldn't the defection payoff d be greater than the coordinating payoff, c, when the other player plays c?

Maybe I am missing something but this seems to be a coordination game and not a prisoner's dilemma.

Economic Logician said...

Anonymous: you are right, this has nothing to do with a prisoner's dilemna.

Anonymous said...

Yes, this is just wrong. cc IS a nash equilibrium (and so is dd), since none has an incentive to deviate.

The blog should be re-written, as it makes no sense at it is.