Third-person Effect and Financial Contagion in the Context of a Global Game

Tai-kuang Ho () and Ming-yen Wu

Open Economies Review, 2012, vol. 23, issue 5, 823-846

Abstract: In this paper we present a psychological channel of financial contagion. We incorporate this new channel of financial contagion in the global game. Our basic assumption is that agents are overestimating the influence of negative messages they ascribe to others, and are thus acting on the basis of this perception. We resort to the psychological studies on the so-called third-person effect to justify this assumption. We show that the third-person effect is rationalizable. Our model has the feature that a crisis in a foreign country can be transmitted to the domestic country, even though there has been no changes in domestic fundamentals. Our model also provides intuitive explanations to the empirical observations that many governments have lost in a confidence game in the past crisis episodes. Copyright Springer Science+Business Media, LLC 2012

Keywords: Global game; Financial contagion; Third-person effect; C72; G15; G18 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11079-011-9215-3 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:openec:v:23:y:2012:i:5:p:823-846

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11079/PS2

DOI: 10.1007/s11079-011-9215-3

Access Statistics for this article

Open Economies Review is currently edited by G.S. Tavlas

More articles in Open Economies Review from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().