This paper studies the effects of rumours on markets. We consider a large population of agents who participate in a two-good exchange economy. Agents communicate with their local neighbors which gives rise to the possible spread of a rumour within the population. Since the rumour may affect preferences, the evolution of the rumour has a direct impact on economic variables, such as market demand and market equilibrium prices. If the rumour dies out (long-run) equilibrium prices correspond to fundamental values, while prices differ from fundamentals if the rumour stays present. When rumour effects are strong the market crashes, in the sense that trade breaks down as the ratio of relative prices converges to zero.
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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
23.
Find related papers by JEL classification: D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
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