Promises and Endogenous Reneging Costs
59 Pages Posted: 27 Apr 2017 Last revised: 29 Feb 2020
Date Written: February 27, 20
We present a novel theoretical mechanism that explains how nonenforceable communication about future actions has the capacity to improve efficiency. We explore a two-player partnership game where each player, before choosing a level of effort to exert on a joint project, makes a cheap talk promise to his partner about his own future effort. We allow agents to incur a psychological cost of reneging on their promises. We demonstrate a strong tendency for evolutionary processes to select agents who incur intermediate costs of reneging, and show that these intermediate costs induce second-best optimal outcomes.
Keywords: Promises, Lying Costs, Joint Projects, Input Games, Partnerships
JEL Classification: C73, D03, D83
Suggested Citation: Suggested Citation