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

Abstract

We outline an empirical framework to guide the analyses of signaling games and focus on three key features: sorting of senders, incentive compatibility of senders, and belief updating of receivers. We apply the framework to answer the following question: Can sellers credibly signal their private information to reduce frictions in negotiations? We argue that some sellers use round numbers to signal their willingness to cut prices in order to sell faster. Using millions of online bargaining interactions we show that items listed at multiples of $100 receive offers that are 8%-12% lower but are 15%-25% more likely to sell, demonstrating an incentive-compatibility trade-off. We then show evidence consistent with sorting and belief updating inherent to cheap-talk models. Patterns in real estate transactions suggest that round-number signaling plays a role in negotiations more generally. JEL classifications: C78, D82, D83, M21. * We thank Panle Jia Barwick, Willie Fuchs, Brett Green, Jakub Kastl, and Greg Lewis for helpful discussions, and many seminar participants for helpful comments. We are grateful to Chad Syverson for sharing data on real estate transactions in the State of Illinois. This paper was previously circulated under the title "Cheap Talk, Round Numbers, and the Economics of Negotiation."

Sequential Bargaining in the Field: Evidence from Millions of Online Bargaining Interactions*

“…The regular peaks in Panel B reflect the prevalence of round numbers (since our bins are constructed to be inclusive on the upper extreme). The increasing use of round numbers at higher prices may be affecting sale price outcomes from Figure 5, consistent with Backus et al (2016). .0015…”

“…The role of communication in bargaining is particularly difficult to assess because it is "cheap talk," however there is theoretical and empirical evidence to suggest it may be important (Farrell and Gibbons, 1989;Radner and Schotter, 1989;Crawford, 1990;Cabral and Sákovics, 1995;Valley et al, 2002). Two recent papers addressing these issues are Backus et al (2016), which documents the use of round numbers as a cheap-talk signal in bargaining, and Backus et al (2018), which exploits a natural experiment in…”

Buying reputation as a signal of quality: Evidence from an online marketplace

“…Second, we use our rich data to provide compelling empirical evidence on the role of signaling in online markets, showing that sellers indeed send credible signals to which buyers respond rationally. This approach complements two recent studies by Backus et al (2019) and Kawai (2013) that use rich data from online marketplaces to provide evidence consistent with signaling equilibria. Third, we expand on the signaling narrative of Nelson (1974), which was directly tested in a recent article by Sahni and Nair (2016).…”

Round Giving: A Field Experiment on Suggested Donation Amounts in Public‐television Fundraising

“…For example, Anderson and Simester (2003) experimented with mail-order catalogue prices, documenting higher quantity demanded for prices with a final digit of 9 than other final digits. Similarly, Backus, Blake, and Tadelis (2016) show that in eBay Best Offer listings, sellers' nonround prices are more likely to be accepted than round prices are. donors, and different fundraising channels.…”

“…Outside of the charitable giving context, researchers have found an impact of round numbers in test taking (Pope and Simonsohn 2011) and bargaining outcomes (Pope, Pope, and Sydnor 2015;Backus, Blake, and Tadelis 2016;Cardella and Seiler 2016). Relatedly, researchers have studied the impact of $9 price endings in the marketplace (Anderson and Simester 2003).…”