Can Rumors and Other Uninformative Messages Cause Illiquidity ?
Radu Vranceanu (),
Damien Besancenot () and
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Delphine Dubart: ESSEC Business School - Essec Business School
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In the model, a group of investors are invited to participate to a high-yield collective project. The project succeeds only if a minimum participation rate is reached. Before taking their decision, investors receive a vague statement about the outcome of a past investment decision. If investors believe that the message has an impact on the beliefs of the others, the problem can be analyzed as a typical global game and would present a threshold equilibrium. If not, in theory both an equilibrium where all invest and an equilibrium where no one invests can occur. In a Lab experiment, a large number of subjects adopt switching strategies consistent with the threshold equilibrium and appear to respond to the orientation of the message. Insights apply to contagion and market manipulation episodes.
Keywords: Illiquidity; Rumors; Market panic; Global games; Strategic uncertainty; Experiments (search for similar items in EconPapers)
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Working Paper: Can Rumors and Other Uninformative Messages Cause Illiquidity ? (2014)
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