Informational cascades elicit private information

Informational cascades elicit private information — International Economic Review, 47: 297-325, 2006
Authors

Olivier Gossner

Nicolas Melissas

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 truthtelling 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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International Economic Review, 47: 297-325, 2006

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Citation

BibTeX citation:
@article{gossner2006,
  author = {Gossner, Olivier and Melissas, Nicolas},
  title = {Informational Cascades Elicit Private Information},
  journal = {International Economic Review},
  date = {2006},
  url = {https://gossner.me/papers/informational-cascades-elicit-private-information.html},
  langid = {en},
  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 truthtelling 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.}
}
For attribution, please cite this work as:
Gossner, Olivier, and Nicolas Melissas. 2006. “Informational Cascades Elicit Private Information.” International Economic Review. https://gossner.me/papers/informational-cascades-elicit-private-information.html.