# 11-069/1 (2011-04-18)

Thomas de Haan, University of Amsterdam; Theo Offerman, University of Amsterdam; Randolph Sloof, University of Amsterdam
cheap talk, burning money, lying costs, experiment
JEL codes:
C91, D82

Published in the 'International Economic Review'.

We experimentally study the strategic transmission of information in a setting where both cheap talk and money can be used for communication purposes. Theoretically a large number of equilibria exist side by side, in which senders either use costless messages, money, or a combination of the two. We find that senders prefer to communicate through costless messages. Only when the interest disalignment between sender and receiver increases, cheap talk tends to break down and high sender types start burning money to enhance the credibility of their costless messages. A behavioral model due to Kartik (2009) assuming that sellers bear a cost of lying fits the data best.