IDEAS home Printed from https://ideas.repec.org/p/boi/wpaper/2019.06.html
   My bibliography  Save this paper

Boom-Bust Cycles of Learning, Investment and Disagreement

Author

Listed:
  • Osnat Zohar

    (Bank of Israel)

Abstract

Real activity as well as expectations often exhibit asymmetric dynamics, namely, they increase gradually with occasional large downturns. Such dynamics emerge in a model with strong feedback between activity and information. In the model, active investment reveals private information about the state of the world. An agent (Follower) only learns about another agent's (Loner's) signals from his actions. Equilibrium in the model generates asymmetric cycles: Entry to the market is gradual; exits tend to be abrupt and are followed by slow recoveries. The asymmetry in the cycle is magnified when information is public. If Follower observes Loner's payoffs and not just his actions, he is more likely to defer his entry compared to the benchmark model. Finally, model simulations show a positive correlation between investment and dispersion of beliefs which is largely attributed to the learning mechanism in the model.​

Suggested Citation

  • Osnat Zohar, 2019. "Boom-Bust Cycles of Learning, Investment and Disagreement," Bank of Israel Working Papers 2019.06, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2019.06
    as

    Download full text from publisher

    File URL: https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2019.06.pdf
    File Function: First version, 2019
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-1085, September.
    2. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-565, June.
    3. Maya Haran Rosen & Orly Sade, 2017. "Does Financial Regulation Unintentionally Ignore Less Privileged Populations? The Investigation of a Regulatory Fintech Advancement, Objective and Subjective Financial Literacy," Bank of Israel Working Papers 2017.10, Bank of Israel.
    4. Mira Frick & Yuhta Ishii, 2015. "Innovation Adoption by Forward-Looking Social Learners," Cowles Foundation Discussion Papers 1877, Cowles Foundation for Research in Economics, Yale University.
    5. Murto, Pauli & Välimäki, Juuso, 2013. "Delay and information aggregation in stopping games with private information," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2404-2435.
    6. Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, January.
    7. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2016. "Understanding Booms and Busts in Housing Markets," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 1088-1147.
    8. Veldkamp, Laura L., 2005. "Slow boom, sudden crash," Journal of Economic Theory, Elsevier, vol. 124(2), pages 230-257, October.
    9. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2007. "Social Learning in One-Arm Bandit Problems," Econometrica, Econometric Society, vol. 75(6), pages 1591-1611, November.
    10. Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1641-1692.
    11. Van Nieuwerburgh, Stijn & Veldkamp, Laura, 2006. "Learning asymmetries in real business cycles," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 753-772, May.
    12. Moscarini, Giuseppe & Squintani, Francesco, 2010. "Competitive experimentation with private information: The survivor's curse," Journal of Economic Theory, Elsevier, vol. 145(2), pages 639-660, March.
    13. Joseph Zeira, 1994. "Informational Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 31-44.
    14. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
    15. Paul Krugman, 2007. "Will there be a dollar crisis? [‘Current account fact and fiction’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 22(51), pages 436-467.
    16. Pauli Murto & Juuso Välimäki, 2011. "Learning and Information Aggregation in an Exit Game," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(4), pages 1426-1461.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Osnat Zohar, 2021. "Cyclicality of Uncertainty and Disagreement," Bank of Israel Working Papers 2021.09, Bank of Israel.
    2. Angelos Kanas & Panagiotis D. Zervopoulos, 2021. "Systemic risk, real GDP growth, and sentiment," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 461-485, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wagner, Peter A., 2018. "Who goes first? Strategic delay under information asymmetry," Theoretical Economics, Econometric Society, vol. 13(1), January.
    2. Bloch, Francis & Fabrizi, Simona & Lippert, Steffen, 2022. "Hiding and herding in market entry," Journal of Economic Theory, Elsevier, vol. 206(C).
    3. Wagner, Peter A. & Klein, Nicolas, 2022. "Strategic investment and learning with private information," Journal of Economic Theory, Elsevier, vol. 204(C).
    4. Doruk Cetemen & Can Urgun & Leeat Yariv, 2023. "Collective Progress: Dynamics of Exit Waves," Journal of Political Economy, University of Chicago Press, vol. 131(9), pages 2402-2450.
    5. Francis Bloch & Simona Fabrizi & Steffen Lippert, 2015. "Learning and collusion in new markets with uncertain entry costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 273-303, February.
    6. Rosenberg, Dinah & Salomon, Antoine & Vieille, Nicolas, 2013. "On games of strategic experimentation," Games and Economic Behavior, Elsevier, vol. 82(C), pages 31-51.
    7. Huanxing Yang, 2010. "Information aggregation and investment cycles with strategic complementarity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 43(2), pages 281-311, May.
    8. Camargo, Braz, 2014. "Learning in society," Games and Economic Behavior, Elsevier, vol. 87(C), pages 381-396.
    9. Chen, Chia-Hui & Ishida, Junichiro & Mukherjee, Arijit, 2023. "Pioneer, early follower or late entrant: Entry dynamics with learning and market competition," European Economic Review, Elsevier, vol. 152(C).
    10. Wagner, Peter, 2015. "Who goes first? Strategic Delay and Learning by Waiting," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 500, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    11. Gene Ambrocio, 2020. "Rational exuberance booms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 263-282, January.
    12. Bonatti, Alessandro & Hörner, Johannes, 2017. "Learning to disagree in a game of experimentation," Journal of Economic Theory, Elsevier, vol. 169(C), pages 234-269.
    13. Heidhues, Paul & Rady, Sven & Strack, Philipp, 2015. "Strategic experimentation with private payoffs," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 531-551.
    14. Ryo Horii & Yoshiyasu Ono, 2005. "Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations," Macroeconomics 0504016, University Library of Munich, Germany.
    15. Schaal, Edouard & Taschereau-Dumouchel, Mathieu, 2023. "Herding through booms and busts," Journal of Economic Theory, Elsevier, vol. 210(C).
    16. Cheremukhin, Anton & Tutino, Antonella, 2016. "Information rigidities and asymmetric business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 142-158.
    17. Kaustav Das & Nicolas Klein & Katharina Schmid, 2020. "Strategic experimentation with asymmetric players," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(4), pages 1147-1175, June.
    18. Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1641-1692.
    19. Klein, Nicolas, 2013. "Strategic learning in teams," Games and Economic Behavior, Elsevier, vol. 82(C), pages 636-657.
    20. Mira Frick & Yuhta Ishii, 2015. "Innovation Adoption by Forward-Looking Social Learners," Cowles Foundation Discussion Papers 1877, Cowles Foundation for Research in Economics, Yale University.

    More about this item

    Keywords

    dynamic learning; asymmetric cycles; slow recovery; private information;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boi:wpaper:2019.06. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Yossi Yakhin (email available below). General contact details of provider: https://edirc.repec.org/data/boigvil.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.