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Informational cascades elicit private information

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  • Olivier Gossner
  • Nicholas 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 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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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 03/6.

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Date of creation: Jun 2003
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Handle: RePEc:lec:leecon:03/6

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Keywords: Cheap Talk; Information Externality; Informational Cascades; Social Learning; Herd Behaviour;

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References

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  1. Chamley, Christophe, 2004. "Delays and equilibria with large and small information in social learning," European Economic Review, Elsevier, Elsevier, vol. 48(3), pages 477-501, June.
  2. Sgroi, D., 2000. "Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare," Economics Papers 2000-w14, Economics Group, Nuffield College, University of Oxford.
  3. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap talk can matter in bargaining," Journal of Economic Theory, Elsevier, Elsevier, vol. 48(1), pages 221-237, June.
  4. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1431-51, November.
  5. Olivier Gossner & Nicolas Melissas, 2006. "Informational Cascades Elicit Private Information ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 297-325, 02.
  6. Farrell, Joseph, 1988. "Communication, coordination and Nash equilibrium," Economics Letters, Elsevier, Elsevier, vol. 27(3), pages 209-214.
  7. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  8. Baliga, Sandeep & Morris, Stephen, 2002. "Co-ordination, Spillovers, and Cheap Talk," Journal of Economic Theory, Elsevier, Elsevier, vol. 105(2), pages 450-468, August.
  9. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 1-25, February.
  10. Gill, D. & Sgroi, D., 2003. "Product Launches with Biased Reviewers: The Importance of Not Being Earnest," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0334, Faculty of Economics, University of Cambridge.
  11. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
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Citations

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Cited by:
  1. Olivier Gossner & Nicolas Melissas, 2004. "Informational Cascades Elicit Private Information," Game Theory and Information, EconWPA 0405007, EconWPA.
  2. Pastine, Tuvana, 2005. "Social Learning in Continuous Time: When are Informational Cascades More Likely to be Inefficient?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5120, C.E.P.R. Discussion Papers.
  3. Matthew Doyle, 2010. "Informational externalities, strategic delay, and optimal investment subsidies," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 43(3), pages 941-966, August.
  4. Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, Elsevier, vol. 56(6), pages 1220-1240.

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