Dynamic Equilibrium Bunching
AbstractIn this paper, we analyze the asymmetric pure strategy equilibria in a dynamic game of pure information externality. Each player receives a private signal and chooses whether and when to invest. In some of the periods, only a subgroup of the players make decisions, which we call bunching, while the rest of the players do not invest regardless of their signals. Bunching is different from herding; it occurs in the first period and recursively until herding takes place or the game runs out of undecided players. We find that any asymmetric pure strategy equilibrium is more efficient than the symmetric mixed strategy equilibrium. When players become patient enough, herding of investment disappears in the most efficient asymmetric pure strategy equilibrium, while the least efficient asymmetric pure strategy equilibrium resembles those in a fixed timing model, producing an exact match when the discount factor is equal to 1. Bunch sizes are shown to be independent of the total number of players; adding more players to the game need not change early players' behavior. All these are unique properties of the asymmetric pure strategy equilibria. We also show that the asymmetric pure strategy equilibria can accommodate small heterogeneities of the players in costs of acquiring signals, discount factors, or degree of risk aversion. In any of these environments, there exists a unique welfare maximizing equilibrium which provides a natural way for the players to coordinate.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 1291.
Length: 42 pages
Date of creation: Nov 2011
Date of revision:
bunching; herding; endogenous timing; asymmetric equilibrium; information externality;
Find related papers by JEL classification:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-27 (All new papers)
- NEP-COM-2012-02-27 (Industrial Competition)
- NEP-CTA-2012-02-27 (Contract Theory & Applications)
- NEP-GTH-2012-02-27 (Game Theory)
- NEP-MIC-2012-02-27 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Daniel Sgroi, 2000.
"The Right Choice at the Right Time: A Herding Experiment in Endogenous Time,"
Economics Series Working Papers
2000-W15, University of Oxford, Department of Economics.
- Daniel Sgroi, 2003. "The Right Choice at the Right Time: A Herding Experiment in Endogenous Time," Experimental Economics, Springer, vol. 6(2), pages 159-180, October.
- Sgroi, D., 2000. "The Right Choice at the Right Time: a Herding Experiment in Endogenous Time," Economics Papers 2000-w15, Economics Group, Nuffield College, University of Oxford.
- Chamley, Christophe & Gale, Douglas, 1994.
"Information Revelation and Strategic Delay in a Model of Investment,"
Econometric Society, vol. 62(5), pages 1065-85, September.
- Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
- Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004.
"Social Learning in One-Arm Bandit Problems,"
1396, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Gul, Faruk & Lundholm, Russell, 1995. "Endogenous Timing and the Clustering of Agents' Decisions," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1039-66, October.
- Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992.
"A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades,"
Journal of Political Economy,
University of Chicago Press, vol. 100(5), pages 992-1026, October.
- 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.
- Scharfstein, David. & Stein, Jeremy C., 1988.
"Herd behavior and investment,"
WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Cao, H. Henry & Han, Bing & Hirshleifer, David, 2011. "Taking the road less traveled by: Does conversation eradicate pernicious cascades?," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1418-1436, July.
- Jianbo Zhang, 1997. "Strategic Delay and the Onset of Investment Cascades," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 188-205, Spring.
- Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
- Naveen Khanna & Richmond D. Mathews, 2011. "Can herding improve investment decisions?," RAND Journal of Economics, RAND Corporation, vol. 42(1), pages 150-174, 03.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock).
If references are entirely missing, you can add them using this form.