Honest Abe or Doc Holliday? Bluffing in Bargaining

We consider a bargaining environment where there is asymmetric information regarding whether the two players have common preferences or conflicting preferences. If the cost of strategic communication is independent of the state, then signaling is not expected to be effective. If the uninformed agent believes, though, a (cheap†talk) signal has been sent, then the informed agents are incentivized to engage in deceptive bluffing. Alternatively, if bluffing is not too prevalent, honest communication can be worthwhile. We explore this theoretically and experimentally. We present a bargaining model where state†dependent mixed strategies arise as equilibria. Thus, bluffing occurs in equilibrium. In the model, players who experience a disutility to engaging in deceptive behavior are then introduced. The set of equilibria are refined and we show, ironically, that the introduction of honest players increases the overall level of deception. We then design an experimental game to assess the validity of the predictions from the theoretical model. We show that agents attempt to strategically transmit information even when (costly) signaling is not possible. Across rounds of the game honest, but cheap talk, signaling and bluffing co†move in that as the former becomes more prevalent so too does the latter. Furthermore, we document a contagion effect in the laboratory. Bluffing not only creates deadweight loss in a particular dyad, but leads the agent who was bluffed to engage in more bargaining conflict in future rounds against a new, randomly†selected opponent. Aggregate wealth is higher prior to the introduction of deception in the group.