How Do Market Prices and Cheap Talk Affect Coordination?

Hong Qu

Journal of Accounting Research, 2013, vol. 51, issue 5, 1221-1260

Abstract: In many scenarios such as banking and liquidity crises, inefficiencies often arise because investors face uncertainties about economic fundamentals and the strategies of other investors. How information affects fundamental uncertainty is well studied, but how information affects strategic uncertainty is underexplored. This paper examines how two communication mechanisms, market and cheap talk, affect investment decisions and efficiency in an experimental investment game with both fundamental and strategic uncertainty. I find that the market does not improve coordination because the expectation that coordination failures will occur is self‐fulfilling, while cheap talk improves coordination because the signals of willingness to invest alleviate strategic uncertainty.

Date: 2013
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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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