Can Rumors and Other Uninformative Messages Cause Illiquidity ?

Radu Vranceanu, Damien Besancenot and Delphine Dubart ()
Additional contact information
Delphine Dubart: ESSEC Business School, Postal: Avenue Bernard Hirsch - BP 50105, 95021 CERGY-PONTOISE Cedex, FRANCE, http://www.essec.edu

No WP1309, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: 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.

Keywords: Illiquidity; Rumors; Market panic; Global games; Strategic uncertainty; Experiments (search for similar items in EconPapers)
JEL-codes: C91 D84 G01 G11 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2013-07, Revised 2014-06
New Economics Papers: this item is included in nep-cbe and nep-exp
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Related works:
Working Paper: Can Rumors and Other Uninformative Messages Cause Illiquidity ? (2014)
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