Informational cascades elicit private information

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 truth-telling 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.
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Submitted on : Tuesday, November 20, 2012 - 8:46:58 AM
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Olivier Gossner, Nicolas Melissas. Informational cascades elicit private information. International Economic Review, Wiley, 2006, 47 (1), pp.297-325. ⟨10.1111/j.1468-2354.2006.00380.x⟩. ⟨halshs-00754174⟩

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