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Experimental Evidence on the ‘Insidious’ Illiquidity Risk

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  • Vranceanu, Radu

    ()
    (ESSEC Business School)

  • Besancenot, Damien

    ()
    (Université Paris 13)

Abstract

This paper brings experimental evidence on investors’ behavior subject to an "illiquidity" constraint, where the success of a risky project depends on the participation of a minimum number of investors. The experiment is set up as a frameless coordination game that replicates the investment context. Results confirm the insidious nature of the illiquidity risk: as long as a first illiquidity default does not occur, investors do not seem able to fully internalize it. After several defaults, agents manage to coordinate on a default probability above which they refuse to participate to the project. This default probability is lower than the default probability of the first illiquidity default.

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Bibliographic Info

Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number WP1107.

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Length: 27 pages
Date of creation: 13 Jul 2011
Date of revision:
Handle: RePEc:ebg:essewp:dr-11007

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Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
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Web page: http://www.essec.edu/
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Keywords: Coordination game; Illiquidity risk; Threshold strategy; Experimental economics;

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