Starting from an example of the Allies ’ decision to feint at Calais and attack Normandy on D-Day, this paper models misrepresentation of intentions to competitors or enemies. Allowing for the possibility of bounded strategic rationality and rational players ’ responses to it yields a sensible account of lying via costless, noiseless messages. In some leading cases, the model has generically unique pure-strategy sequential equilibria, in which rational players exploit boundedly rational players, but are not themselves fooled. In others, the model has generically essentially unique mixed-strategy sequential equilibria, in which rational players’ strategies protect all players from exploitation. (JEL C72, D72, D80) Lord, what fools these mortals be! —Puck, A Midsummer Night’s Dream, Act 3 You may fool all the people some of the time; you can even fool some of the people all the time; but you can’t fool all of the people all the time.

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We examine, experimentally and theoretically, how communication within a partnership may mitigate the problem (highlighted in contract theory) of hidden action. What is the form and content of the communication? Which model of decision-making can capture the impact of communication? We consider free-form communication, measure beliefs (about actions and beliefs), and examine which motivational forces influence subjects. We find they harbor belief-dependent preferences that can be captured using psychological game theory. In particular, agents are influenced by guilt aversion, which suggests a theory of why and how communication influences behavior in which statements of intent and resulting expectations play a special role. This has bearing on how to understand partnerships and contracts.

This paper presents evidence that the willingness to punish an unfair action is sensitive to whether this action was preceded by a deceptive message. One player first sends a message indicating an intended play, which is either favorable or unfavorable to the other player in the game. After the message, the sender and the receiver play a simultaneous 2×2 game, in which the sender may or may not play according to his message. Outcome cells may, hence, be reached following true or false messages. In the third stage, the receiver may (at a cost) punish or reward, depending on which cell of the simultaneous game has been reached. We test whether receivers ’ rates of monetary sacrifice depend on the process by which an outcome is reached. We study two decision-elicitation methods: the strategy and the direct response methods. For each method, deception more than doubles the punishment rate as a response to an action that is unfavorable to the receiver. We also find evidence that 17–25 % of all participants choose to reward a favorable action choice made by the sender, even though doing so leaves one at a payoff disadvantage. Our results reflect on current economic models of utility and have implications for organizational decision-making behavior.

The paper is concerned with communication within a team of players trying to react to information dispersed among them. The problem is nontrivial because they cannot communicate all information, but have to use coarse codes. The paper argues that members gain compatibility advantages by using identical codes, but that this may limit the ability of large teams to adapt to heterogeneous environments. This argument is made in four steps. (1) It is easier to integrate the messages of two members if they use the same code, even if decoding is not a problem. (2) In games where members decide on their codes individually, then for any code, there exists a symmetric equilibrium in which all members use that code. (3) When local environments are heterogeneous, it may be efficient if different members of larger teams use different codes. (4) If the probabilities of alternative equilibria are influenced by which communication channels are open, it may be better to reduce the size of the team by cu...

“What we got here…is a failure to communicate.”

Most literature on the hold–up problem assumes that ex post bargaining outcomes are insensitive to prior investment costs. However, many bargaining procedures admit multiple equilibria and hence allow investment costs to affect bargaining outcomes. On the other hand, multiplicity of equilibria leaves scope for coordination failure. We report on three experiments in which unilateral investment is followed by bilateral bargaining according to Nash’s demand game. The experiments confirm that bargaining outcomes depend on sunk costs. There is also evidence of inefficient bargaining outcomes due to coordination failure. Communication facilitates coordination, but not perfectly. Successful coordination occurs predominantly on “fair ” outcomes. Sellers (investors) do at least as well under buyer authority as under seller authority. JEL classification: L14, C78.

How do individuals achieve "good outcomes" in one-shot strategic situations? One much-explored possibility is that they engage in some kind of preplay communication -- cheap talk -- in which they endeavor to convince one another of the actions they intend to play. However, there may be no incentive for such communication to be truthful, or even informative. Another, less explored, possibility is that individuals take account of their knowledge of the past behavior of others when deciding which actions to play. While these two possibilities have been considered separately, there has been no research examining the relative efficacy of these two devices for the achievement of good outcomes. This paper reports the results from an experiment with human subjects that allows for such a comparison. The effects of cheap talk and observation of past actions are compared with each other, and with the standard (control) case where neither cheap talk nor observation is allowed. We consider three di...

Oligopoly has been among the first topics in experimental economics. Over half a century, some 150 papers have been published. Each individual paper was interested in demonstrating one effect, but in order to do so, experimenters had to specify many more parameters. Thus they have generated a huge body of evidence, untapped so far. This meta-analysis makes this evidence available. More than 100 of the papers lend themselves to calculating an index of collusion. The database behind this paper covers some 500 different settings. The experimental results may be normalized as a percentage of the span between the Walrasian and the Pareto outcomes. In the same way, results may be expressed as a percentage of the distance between the Nash and the Pareto outcomes. For each and every one of the parameters, these two indices make it possible to answer two questions: How far is the market outcome away from the competitive equilibrium? And how good is the Nash prediction? Most importantly, however, the meta-analysis sheds light on how features of the experimental setting interact with each other. Most main effects and many interaction effects are indeed statistically significant. I. RESEARCH QUESTION Richness can be embarrassing. Oligopoly has been among the first topics in experimental economics, from as early as 1959 (Hoggatt, 1959; Selten and Sauermann, 1959). In this time, a total of 154 experimental papers have been published. 1 Many of them report on more than one experiment, so that there is data on more than 500 different parameter constellations. 2 A