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Informational Cascades Elicit Private Information

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  • Olivier Gossner
  • Nicolas Melissas

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 thruthtelling 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. ZUSAMMENFASSUNG - (Informationskaskaden bei Investitionsentscheidungen) Wir modellieren eine zweistufige dynamische Investitionsentscheidung mit Informationsexternalitäten und ‚Cheap Talk’. Dabei können wir zunächst zeigen, dass die Glaubwürdigkeit von 'Cheap Talk'-Aussagen darunter leidet, wenn die Investitionsentscheidung von solchen Informationen beeinflusst wird, die sich eher aus dem Handeln der Mitakteure als durch ihre verbalen Bekundungen ableiten. Dann zeigen wir, dass Informationskaskaden, die alle Akteure dieselbe Handlung aufgrund öffentlicher Information ohne Berücksichtigung ihrer privaten Informationen ausführen lassen, dazu führen, das Offenbaren der wahren Präferenzen der Investoren - optimistisch oder pessimistisch - anreizkompatibel zu machen. Vergleicht man Projekte mit niedrigen und hohen Überschüssen, existiert ein Trenngleichgewicht nur bei letzteren, so dass glaubwürdige Kommunikation eher über Worte als über Taten funktioniert. Will ein sozialer Planer die Investitionsentscheidungen beeinflussen, kann er sowohl durch eine Subventionierung als auch durch eine Besteuerung der Investitionen die Wohlfahrt vergrößern.

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Bibliographic Info

Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number SP II 2004-19.

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Length: 40 pages
Date of creation: Dec 2004
Date of revision:
Publication status: Published in International Economic Review , 47(1), Feb.2006, 297-325.
Handle: RePEc:wzb:wzebiv:spii2004-19

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

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References

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  1. Sgroi, D., 2000. "Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare," Economics Papers 2000-w14, Economics Group, Nuffield College, University of Oxford.
  2. Joseph Farrell and Robert Gibbons., 1988. "Cheap Talk Can Matter in Bargaining," Economics Working Papers 8863, University of California at Berkeley.
  3. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  4. 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.
  5. Olivier Gossner & Nicolas Melissas, 2004. "Informational Cascades Elicit Private Information," CIG Working Papers SP II 2004-19, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  6. Baliga, Sandeep & Morris, Stephen, 2002. "Co-ordination, Spillovers, and Cheap Talk," Journal of Economic Theory, Elsevier, vol. 105(2), pages 450-468, August.
  7. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
  8. Chamley, Christophe, 2004. "Delays and equilibria with large and small information in social learning," European Economic Review, Elsevier, vol. 48(3), pages 477-501, June.
  9. Gill, D. & Sgroi, D., 2003. "Product Launches with Biased Reviewers: The Importance of Not Being Earnest," Cambridge Working Papers in Economics 0334, Faculty of Economics, University of Cambridge.
  10. Farrell, Joseph, 1988. "Communication, coordination and Nash equilibrium," Economics Letters, Elsevier, vol. 27(3), pages 209-214.
  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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Cited by:
  1. Olivier Gossner & Nicholas Melissas, 2003. "Informational cascades elicit private information," Discussion Papers in Economics 03/6, Department of Economics, University of Leicester.
  2. Ivan Pastine & Tuvana Pastine, 2006. "Social Learning in Continuous Time - When are Informational Cascades More Likely to be Inefficient?," Working Papers 200621, School Of Economics, University College Dublin.
  3. Matthew Doyle, 2010. "Informational externalities, strategic delay, and optimal investment subsidies," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 941-966, August.
  4. Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, vol. 56(6), pages 1220-1240.

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