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Business as Usual, Market Crashes, and Wisdom after the Fact


  • Caplin, Andrew
  • Leahy, John


The authors present a three-stage model of market dynamics. In the first stage, routine behavior tends to keep information of common interest trapped in private hands. In the second stage, private information reaches a threshold that triggers some agents to alter their behavior; these actions release information to the market. The final stage involves the market's response to this news as other participants react to the initial departure from routine behavior. The authors present an application to industry investment. They also outline applications to the international debt crisis, to bank runs, and to political upheavals. Copyright 1994 by American Economic Association.

Suggested Citation

  • Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-565, June.
  • Handle: RePEc:aea:aecrev:v:84:y:1994:i:3:p:548-65

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    References listed on IDEAS

    1. Schankerman, Mark & Pakes, Ariel, 1986. "Estimates of the Value of Patent Rights in European Countries during the Post-1950 Period," Economic Journal, Royal Economic Society, vol. 96(384), pages 1052-1076, December.
    2. repec:bin:bpeajo:v:20:y:1989:i:1989-3:p:331-410 is not listed on IDEAS
    3. Huffman, Wallace E. & Evenson, Robert E., 1993. "Science for Agriculture: A Long Term Perspective," Staff General Research Papers Archive 10997, Iowa State University, Department of Economics.
    4. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    5. Ashenfelter, Orley & Krueger, Alan B, 1994. "Estimates of the Economic Returns to Schooling from a New Sample of Twins," American Economic Review, American Economic Association, vol. 84(5), pages 1157-1173, December.
    6. Freeman, Richard B. & Holzer, Harry J. (ed.), 1986. "The Black Youth Employment Crisis," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226261645.
    7. Adam B. Jaffe & Manuel Trajtenberg & Rebecca Henderson, 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 577-598.
    8. Richard B. Freeman & Harry J. Holzer, 1986. "The Black Youth Employment Crisis," NBER Books, National Bureau of Economic Research, Inc, number free86-1, January.
    9. Fellner, William, 1970. "Trends in the Activities Generating Technological Progress," American Economic Review, American Economic Association, vol. 60(1), pages 1-29, March.
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