Common-Value Public Goods and Informational Social Dilemmas

April 15, 2021 - Caleb Cox

Citation: Cox, Caleb A., and Brock Stoddard. “Common-value public goods and informational social dilemmas.” American Economic Journal: Microeconomics, forthcoming

Research Summary:
When firms work together on a business project, such as a joint venture, each partner often has different information regarding a project’s potential, and the project’s profitability often depends on each firm’s investment as well as on the project’s unknown potential.  This situation creates a problematic negotiating situation.  Each firm has an incentive to tell their partner that the project has very high potential in order to encourage partner investment.  Each partner has an incentive to ignore the co-investor’s claims because they might be exaggerating for self-interested reasons.  If the firms could trust one another’s representations, they would be better informed and could make better investment decisions.  This paper uses laboratory methods to examine the capacity of communication to create trust in this context.  We find that communication can improve investment decisions, but truthfulness depends on the strength of the incentive to exaggerate.