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Efficiency Enhancing Communication in Bilateral Bargaining and in Social Dilemmas

Dr. Barry Sopher

Thursday, December 10, 2015, 01:00pm - 02:00pm

Rutgers University, Department of Economics

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The talk will be based on two separate studies, each of which, inter alia, investigate the
role that free-form pre-play communication plays in strategic decision making. The first paper
reports on laboratory analysis of public goods provision and common pool resource management. We
study both the economic and the social dimensions of public goods provision and common pool
resource situations by considering alternative sharing rules (proportional to wealth or equal
sharing), distributions of initial endowments, or harvesting rights (equal or unequal), and risk (low or
high risk of losing endowments if the public good is not provided or maintained), or size of bonus
(magnitude of future benefits from a resource if it is not over-used). Briefly, we find that there are
noticeable effects from social aspects of the situation. The distribution of endowments or harvesting
rights and the sharing rule matter, in the sense that game outcomes are significantly less efficient
when endowment or harvesting rights are asymmetric, and the interaction of equal sharing rules
with these asymmetries also affects efficiency adversely. Communication, however, dramatically
improves efficiency in both public goods and common pool games. When the same set of games are
run with the additional provision that groups are able to communicate prior to making their
individual decisions about contributions or harvesting, the public good is provided at a much higher
rate, and harvesting is much more restrained, enough so that efficiency levels are dramatically
higher. We argue that efficiency is improved because the communication sharpens joint beliefs about
likely behavior of other players of both types (highly and poorly endowed). We believe that the role
of so-called “social preferences” in determining outcomes is weak, and that enhanced precision of
expectations via communication is a much better explanation for the observed results. Interestingly,
groups that can communicate prior to play often successfully achieve efficient outcomes which are
not individually rational for better-endowed members, particularly in the common pool resource
games. We argue that this can be interpreted as, essentially, a re-setting of the social contract,
achieved via the discussion that the cheap talk period allows. Recent fMRI studies of decision
making shed additional light on this idea. In the second paper we study “partnership protocols” of
the sort proposed by Kalai and Kalai (2010), for bilateral trade games with incomplete information.
We compare the efficiency of trade and the nature of bid functions in the standard game (Chatterjee
and Samuelson (1983) to those in other versions of the game, including games in which cheap talk is
allowed prior to trade, games with the formal mechanisms proposed by Kalai and Kalai available as
an option for the traders to use, and games with both the mechanisms and cheap talk available. We
consider ex ante and interim mechanisms. We find that formal mechanisms significantly increase
the efficiency of trade in both the ex ante and interim cases. Specifically, in the baseline game,
traders captured 73% of the available surplus (compared to a theoretical maximum of 84% possible
with optimal strategies). Efficiency rises to 87% and 82% for the ex ante and interim mechanisms,
respectively, and further rises to 90% and 84% when cheap talk is also allowed with the
mechanisms. When only cheap talk is allowed, traders capture 81% (for ex ante talk), but only 70%
(for interim talk). On average, 55% of trading pairs opt in to mechanisms when they are available.

Dr. Barry Sopher