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Informational cascades elicit private information

By Olivier Gossner and Nicholas Melissas


We introduce cheap talk in a dynamic investment model with information externalities. We first show how social learning adversely a ects the credibility of cheap talk messages. Next, we show how an informational cascade makes thruthtelling 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

Topics: Cheap Talk, Information Externality, Informational Cascades, Social Learning, Herd Behaviour
Publisher: Dept. of Economics, University of Leicester.
Year: 2003
OAI identifier:

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