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Rational Frenzies and Crashes

  • Bulow, Jeremy
  • Klemperer, Paul

Most markets clear through a sequence of sales rather than through a Walrasian auctioneer. Because buyers can decide whether to buy now or later, rather than only now or never, their current 'willingness to pay' is much more sensitive to price than the demand curve is. A consequence is that markets will be extremely sensitive to new information, leading to both 'frenzies,' in which demand feeds on itself, and 'crashes,' in which price drops discontinuously. The paper also shows how a result from static auction theory, the revenue equivalence theorem, can be applied to solve for a dynamic price path. Copyright 1994 by University of Chicago Press.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 102 (1994)
Issue (Month): 1 (February)
Pages: 1-23

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Handle: RePEc:ucp:jpolec:v:102:y:1994:i:1:p:1-23
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  1. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  2. 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 548-65, June.
  3. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers RPF-184, University of California at Berkeley.
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  16. anonymous, 1987. "New Zealand economic chronology 1986," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 50, march.
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  18. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
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