Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 645: Efficiency, communication and honesty

Stefano Demichelis () and Jörgen Weibull ()
Additional contact information
Stefano Demichelis: Università degli studi di Pavia, Postal: Dipartimento di matematica F. Casorati, Via Ferrata, 1, 27100 Pavia - Italy
Jörgen Weibull: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: We here develop a model of pre-play communication that generalizes the cheap-talk approach by allowing players to have a lexicographic preference, second to the payoffs in the underlying game, for honesty. We formalize this by way of an honesty (or truth) correspondence between actions and statements, and postulate two axioms met by natural languages. The model is applied to finite and symmetric two-player games and we establish that honest communication and play of the Pareto dominant Nash equilibrium together characterize the unique evolutionarily stable set in generic and symmetric n×n-coordination games. In particular, this holds even in Aumann's (1990) example of a Pareto dominant equilibrium that is not self-enforcing.

Keywords: efficiency; communication; coordination; honesty; evolutionary stability

JEL-codes: C72; C73; D01

22 pages, First version: February 1, 2006. Revised: November 28, 2006.

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