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Informational cascades elicit private information

  • Olivier Gossner
  • Nicholas Melissas


We introduce cheap talk in a dynamic investment model with information externalities. We first show how social learning adversely affects the credibility of cheap talk messages. Next, we show how an informational cascade makes truthtelling incentive compatible. A separating equilibrium only exists for high surplus projects. Both an investment subsidy and an investment tax can increase welfare. The more precise the sender’s information, the higher her incentives to truthfully reveal her private information.

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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 03/6.

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Date of creation: Jun 2003
Date of revision:
Handle: RePEc:lec:leecon:03/6
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  1. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
  2. Farrell, Joseph & Gibbons, Robert, 1988. "Cheap Talk Can Matter in Bargaining," Department of Economics, Working Paper Series qt3qz786xq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  4. 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.
  5. Olivier Gossner & Nicholas Melissas, 2003. "Informational cascades elicit private information," Discussion Papers in Economics 03/6, Department of Economics, University of Leicester.
  6. Farrell, Joseph, 1988. "Communication, coordination and Nash equilibrium," Economics Letters, Elsevier, vol. 27(3), pages 209-214.
  7. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
  8. Baliga, Sandeep & Morris, Stephen, 2002. "Co-ordination, Spillovers, and Cheap Talk," Journal of Economic Theory, Elsevier, vol. 105(2), pages 450-468, August.
  9. Gill, D. & Sgroi, D., 2003. "Product Launches with Biased Reviewers: The Importance of Not Being Earnest," Cambridge Working Papers in Economics 0334, Faculty of Economics, University of Cambridge.
  10. 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.
  11. Sgroi, D., 2000. "Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare," Economics Papers 2000-w14, Economics Group, Nuffield College, University of Oxford.
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