Limited Information Aggregation and Externalities - A Simple Model of Metastable Market

Zheng Gong, Feng Tian and Boyan Xu

MPRA Paper from University Library of Munich, Germany

Abstract: We analyze a model in which agents’ decisions to enter or exit investments are influenced from their individual and external parties’ transaction histories. Actual investment outcomes are unknown to all participants until the end of decision periods, but outcomes do change depending on the number of participating players in the market and the market’s current state of condition. In this particular model, agents have access to external parties’ information from those who are within their specific social network. Our study of limited information aggregation mainly focuses on market responses to investors’ decisions of exiting the investment. With social structures complicating investment outcomes, we present a model that describes how markets can enter relatively stable statuses long enough for exiting participants to return, which brings the investment back to normal conditions. Our model also supports previous studies that limited information aggregation can cause the exogenous shock effect of global collapse.

Keywords: Information aggregation; Social structure; Internet Externality; Simulation (search for similar items in EconPapers)
JEL-codes: D83 D85 (search for similar items in EconPapers)
Date: 2013-12-04
New Economics Papers: this item is included in nep-cdm, nep-ict, nep-mac, nep-mic and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:52143

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