Endogenous Costly Communication and Equilibrium Selection

We examine the effects of communication in a simple coordination game with two Pareto-ranked equilibria in pure strategies. Past research demonstrates that efficient coordination is difficult when communication is not allowed but that costless pre-play communication (cheap talk) can reliably produce coordination on the efficient equilibrium. We introduce two realistic features of communication by making the decision to send a message both endogenous and costly. Even trivial costs dramatically reduce the number of messages sent, but there is surprisingly little efficiency loss relative to costless communication. That is, while tacit coordination is rare when messages are not allowed, it occurs regularly when messages are optional and costly. * We are grateful to the Pittsburgh Experimental Economics Laboratory (PEEL) for access to laboratory resources, and to Russell Cooper, Doug DeJong, Robert Forsythe and Thomas Ross for providing access to their data. We also appreciate helpful comments from seminar participants at Carnegie Mellon, MIT, and the University of Toronto. We are especially thankful to David Cooper and Steven Leider for providing us with thoughtful feedback on an earlier draft.