Published in:Universidad del CEMA Serie Documentos de Trabajo ; No. 492
Extent:
1 Online-Ressource (38 p)
Language:
English
DOI:
10.2139/ssrn.2120779
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments July 2012 erstellt
Description:
Under asymmetric information, dishonest sellers lead to market unraveling in the lemons model. An additional cost of dishonesty is that language becomes cheap talk. We develop instead a model where people derive utility from actions (what they say), as well as from outcomes, so talk is costly. We find that the existence of honest agents that mean what they say is not enough to make trade more likely, unless a traceability condition that prevents arbitrage is met. When we introduce a continuum of misrepresentation cost types and qualities, full market unraveling is not possible and babbling equilibria are eliminated. More generally, costly talk is a special kind of signal, a symbolic signal that presupposes linguistic conventions, otherwise truth and falsehood, as well as misrepresentation costs, are undefined