Communication and Competition

University of Zurich Department of Economics Working Paper No. 74

20 Pages Posted: 18 May 2012

See all articles by Jacob K. Goeree

Jacob K. Goeree

University of Zurich

Jingjing Zhang

Royal Melbourne Institute of Technology, College of Business and Law

Date Written: May 10, 2012

Abstract

Charness and Dufwenberg (American Economic Review, June 2011, 1211-1237) have recently demonstrated that cheap-talk communication raises efficiency in bilateral contracting situations with adverse selection. We replicate their finding and check its robustness by introducing competition between agents. We find that communication and competition act as "substitutes:" communication raises efficiency in the absence of competition but lowers efficiency with competition, and competition raises efficiency without communication but lowers efficiency with communication. We briefly review some behavioral theories that have been proposed in this context and show that each can explain some but not all features of the observed data patterns. Our findings highlight the fragility of cheap-talk communication and may serve as a guide to refine existing behavioral theories.

Keywords: Cheap talk, adverse selection, competition, guilt aversion, lie aversion, inequality aversion, reciprocity

JEL Classification: C92

Suggested Citation

Goeree, Jacob K. and Zhang, Jingjing, Communication and Competition (May 10, 2012). University of Zurich Department of Economics Working Paper No. 74, Available at SSRN: https://ssrn.com/abstract=2060977 or http://dx.doi.org/10.2139/ssrn.2060977

Jacob K. Goeree (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/jgoeree.html

Jingjing Zhang

Royal Melbourne Institute of Technology, College of Business and Law ( email )

Australia

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