Riding Free on the Signals of Others

Alexander-Cook, Kim, Dan Bernhardt () and Joanne Roberts ()

No 927, Working Papers from Queen's University, Department of Economics

Abstract: This paper looks at the incentives to free-ride on the information signaling of others and shows how this can lead to delay in productive activity and to a cascade of activity once information is signaled. In the presence of increasing returns to scale to a profitable project, an initial pioneer may have to incur short-term losses to signal the opportunity to others. Agents may prefer to defer entry in the hope that others will incur those losses and thereby convey the information. Free-riding incentives can be so strong that profitable projects may not be undertaken. Free-riding is worsened when potential entrants must first acquire a costless signal about the project, and this information acquisition is observed: not acquiring the information commits and agent not to incur the entry costs.

Keywords: INFORMATION (search for similar items in EconPapers)
JEL-codes: D82 D80 D89 (search for similar items in EconPapers)
Date: Written

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Journal Article: Riding free on the signals of others (1998)
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Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:927

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