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Informational Cascades Elicit Private Information

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Author Info
Olivier Gossner
Nicolas Melissas

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Abstract

We introduce cheap talk in a dynamic investment model with information externalities. We first show how social learning adversely affects the credibility of cheap talk messages. Next, we show how an informational cascade makes truth-telling incentive compatible. A separating equilibrium only exists for high-surplus projects. Both an investment subsidy and an investment tax can increase welfare. The more precise the sender's information, the higher her incentives to truthfully reveal her private information. Copyright 2006 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-2354.2006.00380.x
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Publisher Info
Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 47 (2006)
Issue (Month): 1 (02)
Pages: 297-325
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Handle: RePEc:ier:iecrev:v:47:y:2006:i:1:p:297-325

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sgroi, Daniel, 2002. "Optimizing Information in the Herd: Guinea Pigs, Profits, and Welfare," Games and Economic Behavior, Elsevier, vol. 39(1), pages 137-166, April. [Downloadable!] (restricted)
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  2. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February. [Downloadable!] (restricted)
  3. Olivier Gossner & Nicolas Melissas, 2004. "Informational Cascades Elicit Private Information," Game Theory and Information 0405007, EconWPA. [Downloadable!]
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  4. Gill, D. & Sgroi, D., 2003. "Product Launches with Biased Reviewers: The Importance of Not Being Earnest," Cambridge Working Papers in Economics 0334, Faculty of Economics, University of Cambridge. [Downloadable!]
  5. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October. [Downloadable!] (restricted)
  6. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap talk can matter in bargaining," Journal of Economic Theory, Elsevier, vol. 48(1), pages 221-237, June. [Downloadable!] (restricted)
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  7. Chamley, Christophe, 2004. "Delays and equilibria with large and small information in social learning," European Economic Review, Elsevier, vol. 48(3), pages 477-501, June. [Downloadable!] (restricted)
  8. Baliga, Sandeep & Morris, Stephen, 2002. "Co-ordination, Spillovers, and Cheap Talk," Journal of Economic Theory, Elsevier, vol. 105(2), pages 450-468, August. [Downloadable!] (restricted)
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  9. Farrell, Joseph, 1988. "Communication, coordination and Nash equilibrium," Economics Letters, Elsevier, vol. 27(3), pages 209-214. [Downloadable!] (restricted)
  10. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring. [Downloadable!] (restricted)
  11. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November. [Downloadable!] (restricted)
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  1. Olivier Gossner & Nicolas Melissas, 2004. "Informational Cascades Elicit Private Information," CIG Working Papers SP II 2004-19, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
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