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Rational exuberance

  • Heidhues, Paul
  • Melissas, Nicolas

We study a two-player investment game with information externalities. Necessary and sufficient conditions for a unique symmetric switching equilibrium are provided. When public news indicates that the investment opportunity is very profitable, too many types are investing early and investments should therefore be taxed. Conversely, any positive investment tax is suboptimally high if the public information is sufficiently unfavorable.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 6 ()
Pages: 1220-1240

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:6:p:1220-1240
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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