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Rational exuberance

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  • Heidhues, Paul
  • Melissas, Nicolas

Abstract

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.

Suggested Citation

  • Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, vol. 56(6), pages 1220-1240.
  • Handle: RePEc:eee:eecrev:v:56:y:2012:i:6:p:1220-1240
    DOI: 10.1016/j.euroecorev.2012.05.010
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    References listed on IDEAS

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    More about this item

    Keywords

    Information externality; Social learning; Strategic waiting; Delay; Information cascade;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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