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Informational Cascades Elicit Private Information

Author

Listed:
  • Olivier Gossner

    (CERAS)

  • Nicolas Melissas

    (University of Leicester)

Abstract

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 thruthtelling 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.

Suggested Citation

  • Olivier Gossner & Nicolas Melissas, 2004. "Informational Cascades Elicit Private Information," Game Theory and Information 0405007, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpga:0405007
    Note: Type of Document - pdf; pages: 47
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/game/papers/0405/0405007.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Baliga, Sandeep & Morris, Stephen, 2002. "Co-ordination, Spillovers, and Cheap Talk," Journal of Economic Theory, Elsevier, vol. 105(2), pages 450-468, August.
    3. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap talk can matter in bargaining," Journal of Economic Theory, Elsevier, vol. 48(1), pages 221-237, June.
    4. Sgroi, Daniel, 2002. "Optimizing Information in the Herd: Guinea Pigs, Profits, and Welfare," Games and Economic Behavior, Elsevier, vol. 39(1), pages 137-166, April.
    5. 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.
    6. Olivier Gossner & Nicolas Melissas, 2006. "Informational Cascades Elicit Private Information ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 297-325, February.
    7. 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.
    8. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
    9. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    10. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
    11. Farrell, Joseph, 1988. "Communication, coordination and Nash equilibrium," Economics Letters, Elsevier, vol. 27(3), pages 209-214.
    12. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Paul Heidhues & Nicolas Melissas, 2010. "Technology adoption, social learning, and economic policy," ESMT Research Working Papers ESMT-10-007, ESMT European School of Management and Technology.
    2. Olivier Gossner & Nicolas Melissas, 2006. "Informational Cascades Elicit Private Information ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 297-325, February.
    3. Wagner, Peter A. & Klein, Nicolas, 2022. "Strategic investment and learning with private information," Journal of Economic Theory, Elsevier, vol. 204(C).
    4. Camara, Fanny, 2019. "Avoiding Judgement by Recommending Inaction: Beliefs Manipulation and Reputational Concerns," CEPR Discussion Papers 14149, C.E.P.R. Discussion Papers.
    5. Matthew Doyle, 2010. "Informational externalities, strategic delay, and optimal investment subsidies," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 941-966, August.
    6. Pastine, Tuvana, 2005. "Social Learning in Continuous Time: When are Informational Cascades More Likely to be Inefficient?," CEPR Discussion Papers 5120, C.E.P.R. Discussion Papers.
    7. Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, vol. 56(6), pages 1220-1240.
    8. Matthew Doyle, 2010. "Informational externalities, strategic delay, and optimal investment subsidies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(3), pages 941-966, August.

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    More about this item

    Keywords

    Cheap Talk; Information Externality; Informational Cascades; Social Learning; Herd Behaviour;
    All these keywords.

    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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