Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/84411
Authors: 
Streb, Jorge M.
Torrens, Gustavo
Year of Publication: 
2012
Series/Report no.: 
Serie Documentos de Trabajo, Universidad del CEMA: Área: economía 492
Abstract: 
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.
Subjects: 
asymmetric information
honesty
trust
symbols
signals
costly talk
JEL: 
D8
C7
Document Type: 
Working Paper

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