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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.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 84 (1994)
Issue (Month): 3 (June)
Pages: 548-65

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Handle: RePEc:aea:aecrev:v:84:y:1994:i:3:p:548-65
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