Informational cascades elicit private information

Olivier Gossner and Nicholas Melissas ()

No 03/6, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: We introduce cheap talk in a dynamic investment model with information externalities. We first show how social learning adversely affects the credibility of cheap talk messages. Next, we show how an informational cascade makes truthtelling incentive compatible. A separating equilibrium only exists for high surplus projects. Both an investment subsidy and an investment tax can increase welfare. The more precise the sender’s information, the higher her incentives to truthfully reveal her private information.

Keywords: Cheap Talk; Information Externality; Informational Cascades; Social Learning; Herd Behaviour (search for similar items in EconPapers)
JEL-codes: D62 D83 (search for similar items in EconPapers)
Date: 2003-06
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: INFORMATIONAL CASCADES ELICIT PRIVATE INFORMATION * (2006)
Working Paper: Informational cascades elicit private information (2006)
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