Rational Frenzies and Crashes

Jeremy I. Bulow and Paul Klemperer

No 593, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Most markets clear through a sequence of sales rather than through a Walrasian auctioneer. Because buyers can decide whether to buy now or later, rather than only now or never, their current `willingness to pay' is much more sensitive to price than is the demand curve. In consequence, markets will be extremely sensitive to new information, leading to frenzies where demand feeds upon itself, and crashes where price drops discontinuously. Although no buyer's independent reservation value reveals much about overall demand, a small increase in one such value can cause a large increase or decrease in average price.

Keywords: Auctions; Crashes; Frenzies; Market Clearing (search for similar items in EconPapers)
JEL-codes: D44 G10 G14 (search for similar items in EconPapers)
Date: 1991-10
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Rational Frenzies and Crashes (1994)
Working Paper: Rational Frenzies and Crashes (1991)
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