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INFORMATIONAL CASCADES ELICIT PRIVATE INFORMATION*
Author(s) -
Gossner Olivier,
Melissas Nicolas
Publication year - 2006
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2006.00380.x
Subject(s) - private information retrieval , incentive , information cascade , subsidy , microeconomics , credibility , externality , investment (military) , cheap talk , communication source , economics , welfare , complete information , business , computer science , market economy , computer security , telecommunications , statistics , mathematics , politics , political science , law
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.