Pre-play Communication in Games of Two-Sided Incomplete Information

Communication, even cheap talk in a pre-play stage, is commonly viewed as important for inducing information revelation, coordination, and efficient outcomes. Yet, many current results are based on two assumptions that seem to be inconsistent with many interesting empirical situations: that only one player is privately informed and that actors have no constraints limiting their actions. We remedy both of these deficiencies by specifying a more general model of cheap talk with two-sided incomplete information and bounded action spaces. We find that, typically, full information transmission is possible even with two-sided private information if action spaces are unbounded. On the other hand, imposing bounds on the action spaces of the actors can reduce or even completely prevent information transmission and coordination. The nature of these results, in turn, depend on whether actions are substitutes (e.g., public goods provision) or complements (e.g., an arms race). Thus, our results emphasize that the resource constraints of players and the nature of the strategic interaction can have a significant effect on the potential gains offered by pre-play communication. JEL Classification: C72