Do Actions Speak Louder Than Words? An Experimental Comparison of Observation and Cheap Talk

This paper reports results from an experiment designed to compare cheap talk and observation of past actions. We consider three games and explain why cheap talk or observation is likely to be more effective for achieving good outcomes in each game. We find that both cheap talk and observation make cooperation and coordination more likely and increase payoffs, relative to our control treatment. The relative success of cheap talk versus observation depends on the game, in accordance with our predictions. We also find that players' signals are informative, and that signal receivers condition their actions on the signal they receive. (C) 2002 Elsevier Science (USA).