Cheap Talk in the Decentralized Market for Lemons

This paper develops a decentralized market structure where sellers have private information about the quality of goods (adverse selection) and strategically transmit information to buyers through non-binding and costless advertisement (cheap talk). I demonstrate that cheap talk can be informative and thus mitigate information friction in the market. The key insight is that cheap-talk messages can serve as an instrument that creates endogenous market segmentation, and the incentives of agents can be aligned in a way that sellers partially reveal their qualities and buyers compensate for such behaviors.

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