Talk Is Cheap

Abstract

Although Friedrich A. von Hayek, Leonid Hurwicz, and others stressed how the price system communicates private information (on preferences, technology, and endowments), our main means of communication is surely words. But it is unclear whether mere words can be trusted: absent outside sanctions for lying (such as perjury law or a valuable reputation for honesty), talk is cheap. The perspective of the standard theory of signaling seems to suggest that cheap talk should be uninformative, but this is misleading: cheap talk can sometimes convey information and affect real (payoffrelevant) actions. Yet cheap talk's power is limited: for example, even given an unlimited chance to talk, rational people may not reach an equilibrium, or may not escape a bad one. A growing literature in game theory, political science, and economics, which I cannot survey here, studies what cheap talk can and cannot do. Here, I merely sketch some themes.

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