DP8759 Efficient Cheap Talk in Directed Search: On the Non-essentiality of Commitment in Market Games

Author(s): Kyungmin Kim, Philipp Kircher
Publication Date: January 2012
Keyword(s): cheap talk, commitment, competitive search, directed search
JEL(s): C72, D82, D83
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8759

Directed search models are market games in which each firm announces a wage commitment to attract a worker. Miscoordination among workers generates search frictions, yet in equilibrium more productive firms post more attractive wage commitments to fill their vacancies faster, which yields constrained efficient outcomes. We show that commitment is not essential: Exactly the same efficient allocation can be sustained when announcements are pure cheap talk followed by a suitable subsequent wage-formation stage. The insights from existing commitment models extend unchanged to such a cheap-talk environment, even when workers differ in outside opportunities or observable common productivity.