Journal article
Cheap Talk, Fraud, and Adverse Selection in Financial Markets: Some Experimental Evidence
The Review of financial studies, Vol.12(3), pp.481-518
10/01/1999
DOI: 10.1093/revfin/12.3.0481
Abstract
We examine communication in laboratory games with asymmetric information. Sellers know true asset qualities. Potential buyers only know the quality distribution. Prohibiting communication, we document the degree of adverse selection. Then we examine two alternative communication mechanisms. Under "cheap talk," each seller can announce any subset of qualities. Under "antifraud," the subset must include the true quality. Both mechanisms improve market efficiency, but very differently. Relying on sellers' frequently exaggerated claims, buyers often overpay under cheap talk. Efficiency gains come at the buyers' expense. The antifraud rule improves efficiency further and eliminates the wealth transfer from buyers to sellers.
Details
- Title: Subtitle
- Cheap Talk, Fraud, and Adverse Selection in Financial Markets: Some Experimental Evidence
- Creators
- Robert Forsythe - University of IowaRussell Lundholm - University of Michigan–Ann ArborThomas Rietz - University of Iowa
- Resource Type
- Journal article
- Publication Details
- The Review of financial studies, Vol.12(3), pp.481-518
- Publisher
- Oxford University Press
- DOI
- 10.1093/revfin/12.3.0481
- ISSN
- 0893-9454
- eISSN
- 1465-7368
- Language
- English
- Date published
- 10/01/1999
- Academic Unit
- Economics; Finance
- Record Identifier
- 9984380391902771
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