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Technology adoption, social learning, and economic policy

Author Info

Listed author(s):
  • Paul Heidhues

    (ESMT European School of Management and Technology)

  • Nicolas Melissas

    (CIE – ITAM)

Abstract

We study a two-player dynamic investment model with information externalities and provide necessary and sufficient conditions for a unique switching equilibrium. Within this setup, we ask whether policymakers should interfere when better informed agents make individual investment decisions. We find that when the public information is sufficiently high and a social planer therefore expects an investment boom, investments should be taxed. Conversely, any positive investment tax is suboptimally high if the public information is sufficiently unfavorable. We also show that an investment tax may increase overall investment activity.

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File URL: http://static.esmt.org/publications/workingpapers/ESMT-10-007.pdf
File Function: First version, 2010
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Paper provided by ESMT European School of Management and Technology in its series ESMT Research Working Papers with number ESMT-10-007.

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Length: 46 pages
Date of creation: 17 Nov 2010
Handle: RePEc:esm:wpaper:esmt-10-007
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Keywords: information externality; strategic waiting; delay; information cascade; investment boom; optimal taxation;

Other versions of this item:

Find related papers by 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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  1. George-Marios Angeletos & Alessandro Pavan, 2009. "Policy with Dispersed Information," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 11-60, 03.
  2. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-1085, September.
  3. Chamley, Christophe, 2004. "Delays and equilibria with large and small information in social learning," European Economic Review, Elsevier, vol. 48(3), pages 477-501, June.
  4. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-748, September.
  5. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
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Cited by:

  1. Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, vol. 56(6), pages 1220-1240.

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