Meaningful Talk

Jorge M. Streb (Universidad del Cema)
Gustavo Torrens (Washington University in St. Louis)

Abstract: The standard approach to language in economics is that talk is cheap. Here, instead, language is a social convention that affects utility. We apply this approach to the market for lemons. When the buyer and the seller arrange to meet, the words they use are signs that carry a conventional meaning, and talk is effective if mutual trust exists. Uninformative equilibria only come about with completely pessimistic expectations. In the negotiation stage, uninformative equilibria disappear if misrepresentation is costly. Utility leads words to become signals.

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