Rational Frenzies and Crashes

Jeremy Bulow and Paul Klemperer

No 112, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: Most markets clear through a sequence of sales rather than through a Walrasian auctioneer. Because buyers can decide between buying now or later, rather than only now or never, buyers' current 'willingness to pay' is much more sensitive to price than is the demand curve. A consequence is that markets will be extremely sensitive to new information, leading to both '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.

Date: 1991-09
Note: ME
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Citations: View citations in EconPapers (5)

Published as Journal of Political Economy, vol. 102, no. 1, pp. 1-23, (February 1993)

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