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INVESTMENT CYCLES, STRATEGIC DELAY, AND SELF‐REVERSING CASCADES*
Author(s) -
Peck James,
Yang Huanxing
Publication year - 2011
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.1468-2354.2010.00628.x
Subject(s) - investment (military) , economics , return on investment , boom , monetary economics , recession , investment strategy , microeconomics , reversing , macroeconomics , materials science , production (economics) , environmental engineering , politics , political science , market liquidity , law , composite material , engineering
We study investment cycles in a social learning model, where investment returns fluctuate according to a Markov process. In our Waiting Game, agents observe the investment history and a private signal correlated with the current period’s investment return. Agents then decide whether to invest immediately or to delay their decision to later in the period. Cascades in which everyone invests or no one invests eventually reverse themselves. As compared to the No‐Waiting Game with no opportunity for delay, the Waiting Game has shorter investment cascades, longer recessions, shorter booms, more underinvestment, and less overinvestment.