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Can Rumors and Other Uninformative Messages Cause Illiquidity ?

  • Radu Vranceanu

    ()

    (Economics Department - ESSEC Business School)

  • Damien Besancenot

    ()

    (CEPN - Centre d'Economie de l'Université Paris Nord - CNRS : UMR7234 - Université Paris 13 - Université Sorbonne Paris Cité (USPC))

  • Delphine Dubart

    (ESSEC Business School - ESSEC Business School)

In the model, a group of investors are invited to participate to a high-yield collective project. The project succeeds only if a minimum participation rate is reached. Before taking their decision, investors receive a vague statement about the outcome of a past investment decision. If investors believe that the message has an impact on the beliefs of the others, the problem can be analyzed as a typical global game and would present a threshold equilibrium. If not, in theory both an equilibrium where all invest and an equilibrium where no one invests can occur. In a Lab experiment, a large number of subjects adopt switching strategies consistent with the threshold equilibrium and appear to respond to the orientation of the message. Insights apply to contagion and market manipulation episodes.

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Date of creation: Jun 2014
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Handle: RePEc:hal:journl:hal-00841167
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