On the Empirical Content of Cheap-Talk Signaling: An Application to Bargaining

Matthew Backus, Thomas Blake and Steven Tadelis

Journal of Political Economy, 2019, vol. 127, issue 4, 1599 - 1628

Abstract: We outline a framework for the empirical analysis of signaling games based on three features: sorting, incentive compatibility, and beliefs. We apply it to document cheap-talk signaling in the use of round-number offers during negotiations. Using millions of online bargaining interactions, we show that items listed at multiples of $100 receive offers that are 8–12 percent lower but are 15–25 percent more likely to sell, demonstrating the trade-off requisite for incentive compatibility. Those same sellers are more likely to accept a similar offer, and buyers are more likely to investigate their listings, consistent with seller sorting and buyer belief updating.

Date: 2019
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