Scandinavian Working Papers in Economics

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

No 680: When Does Communication Improve Coordination?

Tore Ellingsen () and Robert Östling ()
Additional contact information
Tore Ellingsen: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Robert Östling: Institute for International Economic Studies, Postal: Stockholm University, SE-106 91 Stockholm, Sweden

Abstract: We study costless pre-play communication of intentions among inexperienced players. Using the level-k model of strategic thinking to describe players' beliefs, we fully characterize the effects of pre-play communication in symmetric 2×2 games. One-way communication weakly increases coordination on Nash equilibrium outcomes, although average payoffs sometimes decrease. Two-way communication further improves payoffs in some games, but is detrimental in others. Moving beyond the class of symmetric 2×2 games, we find that communication facilitates coordination in common interest games with positive spillovers and strategic complementarities, but there are also games in which any type of communication hampers coordination.

Keywords: Pre-play communication; cheap talk; coordination; level-k; cognitive hierarchy

JEL-codes: C72

30 pages, First version: November 27, 2007. Revised: October 13, 2009. Earlier revisions: June 19, 2008, June 19, 2008, April 17, 2009, October 13, 2009.

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