We outline an empirical framework to guide the analyses of signaling games and focus on three key features: sorting of senders, incentive compatibility of senders, and belief updating of receivers. We apply the framework to answer the following question: Can sellers credibly signal their private information to reduce frictions in negotiations? We argue that some sellers use round numbers to signal their willingness to cut prices in order to sell faster. Using millions of online bargaining interactions we show that items listed at multiples of $100 receive offers that are 8%-12% lower but are 15%-25% more likely to sell, demonstrating an incentive-compatibility trade-off. We then show evidence consistent with sorting and belief updating inherent to cheap-talk models. Patterns in real estate transactions suggest that round-number signaling plays a role in negotiations more generally.
Backus, Matthew, Tom Blake, and Steven Tadelis. "On the Empirical Content of Cheap-Talk Signaling: An Application to Bargaining." Journal of Political Economy (forthcoming).
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