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 truthtelling 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.
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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number
03/6.
Length: Date of creation: Jun 2003 Date of revision: Handle: RePEc:lec:leecon:03/6
Contact details of provider: Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK Phone: +44 (0)116 252 2887 Fax: +44 (0)116 252 2908 Email: Web page: http://www.le.ac.uk/economics/
Find related papers by JEL classification: D62 - Microeconomics - - Welfare Economics - - - Externalities D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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