Experimental Evidence on the 'Insidious' Illiquidity Risk

Damien Besancenot (1) , Radu Vranceanu (2)

1 CEPN - Centre d'Economie de l'Université Paris Nord
2 ESSEC Business School and THEMA (UMR 8184)

This paper brings experimental evidence on investors' behavior subject to an "illiquidity" constraint, where the success of a risky project depends on the participation of a minimum number of investors. The experiment is set up as a frameless coordination game that replicates the investment context. Results confirm the insidious nature of the illiquidity risk: as long as a first illiquidity default does not occur, investors do not seem able to fully internalize it. After several defaults, agents manage to coordinate on a default probability above which they refuse to participate to the project. This default probability is lower than the default probability of the first illiquidity default.

Mots clés: Coordination game; Illiquidity risk; Threshold strategy; Experimental economics

Domaines: Droit; Economies et finances

Damien Besancenot, Radu Vranceanu. Experimental Evidence on the 'Insidious' Illiquidity Risk. 2011. ⟨hal-00607867v2⟩