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Limited Information Aggregation and Externalities - A Simple Model of Metastable Market

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  • Gong, Zheng
  • Tian, Feng
  • Xu, Boyan
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    Abstract

    We analyze a model in which agents’ decisions to enter or exit investments are influenced from their individual and external parties’ transaction histories. Actual investment outcomes are unknown to all participants until the end of decision periods, but outcomes do change depending on the number of participating players in the market and the market’s current state of condition. In this particular model, agents have access to external parties’ information from those who are within their specific social network. Our study of limited information aggregation mainly focuses on market responses to investors’ decisions of exiting the investment. With social structures complicating investment outcomes, we present a model that describes how markets can enter relatively stable statuses long enough for exiting participants to return, which brings the investment back to normal conditions. Our model also supports previous studies that limited information aggregation can cause the exogenous shock effect of global collapse.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52143.

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    Date of creation: 04 Dec 2013
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    Handle: RePEc:pra:mprapa:52143

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    Keywords: Information aggregation; Social structure; Internet Externality; Simulation;

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    1. Hikmet Gunay, 2008. "The role of externalities and information aggregation in market collapse," Economic Theory, Springer, Springer, vol. 35(2), pages 367-379, May.
    2. Guarino, Antonio & Huck, Steffen & Jeitschko, Thomas D., 2006. "Averting economic collapse and the solipsism bias," Games and Economic Behavior, Elsevier, Elsevier, vol. 57(2), pages 264-285, November.
    3. Curtis R. Taylor & Thomas D. Jeitschko, 2001. "Local Discouragement and Global Collapse: A Theory of Coordination Avalanches," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 208-224, March.
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