Intuitively, we expect that players who are allowed to engage in
costless communication before playing a game would be foolish to
agree on an inefficient outcome amongst the set of equilibria. At the
same time, however, such pre-play communication has been suggested
as a rationale for expecting Nash equilibria in general. This ...
Intuitively, we expect that players who are allowed to engage in
costless communication before playing a game would be foolish to
agree on an inefficient outcome amongst the set of equilibria. At the
same time, however, such pre-play communication has been suggested
as a rationale for expecting Nash equilibria in general. This paper
presents a plausible formal model of cheap talk that distinguishes and
resolves these possibilities. Players are assumed to have an unlimited
opportunity to send messages before playing an arbitrary game. Using
an extension of fictitious play beliefs, minimal assumptions are made
concerning which messages about future actions are credible and hence
contribute to final beliefs. In this environment it is shown that meaningful communication among players leads to a Nash equilibrium (NE)
of the action game. Within the set of NE, efficiency then turns out to
be a consequence of imposing optimality on the cheap talk portion of
the extended game. This finding contrasts with previous “babbling”
results.