Abstract and Keywords
This article looks at evidence of the effect of communication in bargaining, even in settings in which economic theory predicts that communication will have no effect. It specifically presents data from various bargaining experiments. It also looks at the impact of cheap talk in laboratory experiments involving principal–agent and buyer–seller interactions. The possible outcome of communicating a the greater compliance and a decreased necessity for further legal battles. It is noted that communication has led to substantially better social outcomes. The impact of communication depends on the content of the communication. It is then shown that nonbinding and costless communication is typically beneficial in attaining better and more efficient outcomes in bargaining environments, including in principal–agent and buyer–seller interactions. There are still a number of cautionary notes that need to be made with regard to when statements are trustworthy and how communication influences bargaining outcomes in asymmetric environments.
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