Cheap Talk

TLDR

Economists study how private information is shared via markets and costly signaling, yet most sharing occurs informally, and they hold conflicting views on whether cheap talk leads to efficient equilibria or is never credible. The authors argue that both prevailing views on cheap talk are incorrect. They review recent game‑theoretic research to explain when individuals will convey private information through cheap talk.

Abstract

Economists often ask how private information is shared through markets, costly signaling, and other mechanisms. Yet most information sharing is done through ordinary, informal talk. Economists are inconsistent in their view of such ‘cheap talk’: sometimes it is supposed that communication generally leads to efficient equilibria; other times it is supposed that since ‘talk is cheap,’ it is never credible. The authors think both views are wrong. In this paper, they describe what some recent research in game theory teaches about when people will convey private information by cheap talk.