Can Rumors and Other Uninformative Messages Cause Illiquidity ?

Abstract : In the model, a group of investors are invited to participate to a high-yield collective project. The project succeeds only if a minimum participation rate is reached. Before taking their decision, investors receive a vague statement about the outcome of a past investment decision. If investors believe that the message has an impact on the beliefs of the others, the problem can be analyzed as a typical global game and would present a threshold equilibrium. If not, in theory both an equilibrium where all invest and an equilibrium where no one invests can occur. In a Lab experiment, a large number of subjects adopt switching strategies consistent with the threshold equilibrium and appear to respond to the orientation of the message. Insights apply to contagion and market manipulation episodes.
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Submitted on : Tuesday, July 15, 2014 - 2:37:54 PM
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Radu Vranceanu, Damien Besancenot, Delphine Dubart. Can Rumors and Other Uninformative Messages Cause Illiquidity ?. 2014. ⟨hal-00841167v2⟩

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