21,341 research outputs found
Market crashes and informational avalanches
No full textThis paper analyses a security market with transaction costs and a sequential trading structure. Transaction costs may prevent many traders from revealing their private information if they trade in a sequential fashion. Due to the information aggregation failure, hidden information gets accumulated in the market which may be revealed by a small trigger, yielding a high volatility in the absence of an accompanying event. The paper first characterizes the optimal trading strategy of the agent which constitute the unique equilibrium. Further properties of the price sequence are obtained using the concepts of informational cascade and informational avalanche.The results are applied to the explanation of market crashes. In particular, the dynamics of market crashes are illustrated as evolving through the following four phases: (1) boom; (2) euphoria; (3) trigger; and (4) panic; where the euphoria corresponds to the informational cascade and the panic corresponds to the informational avalanche
Interactive contagion
No full textA local interaction game is a game where agents play an identical stage game against their neighbors over time. This paper obtains a general result on the long-run equilibrium distribution of the local interaction game whose stage game is the 2 x 2 coordination game. It is established that starting from a random initial configuration with a positive probability of playing the risk dominant strategy, a sufficiently large population coordinates on the risk dominant equilibrium with probability 1 for the nearest neighbor interactionOur result improves previous ones including Blume (1995), Ellison (1993,1995), and Morris (1997) in a non-trivial way. It proves that there is an interactive contagion mechanism through which the risk dominant equilibrium may spread, in addition to the autonomous mechanism considered by others. Taking advantage of the mechanism we prove that for the nearest neighbor interaction, half dominance is sufficient for the degenerate long-run equilibrium distribution concentrated on the risk dominant strategy
Learning-by-doing and the choice of technology: the role of patience
No full textJovanovic and Nyarko (1996) showed that when agents learn-by-doing and are myopic, less advanced agents may adopt new technologies while more advanced firms stick with the old technology since the new technology takes time to learn. In this case, the less advanced agents might eventually overtake (or "leapfrog") the advanced agents. We show that this kind of overtaking can also occur if agents are forward looking and have high discount rates. However, if agents are sufficiently patient, overtaking cannot occur. A lower discount rate increases the set of states at which agents adopt new technologies, so more patient agents tend to upgrade their technology more frequently
A theory of economic obsolescence
No full textA new generation of durable goods makes an old generation economically, even if not physically, obsolete. Economic obsolescence due to technological innovation requires the durable goods monopolist to implement price discrimination in two dimensions, both between consumers with different valuations and between consumers with different purchase histories. Equilibrium in the game between the durable goods monopolist and consumers depends on the extent of economic obsolescence and the relative sizes of the consumer groups. Underinvestment in innovation may take place. This contrasts with the standard literature on planned obsolescence where the durable goods monopolist overinvests in durability reducing technology
Learning and asymmetric business cycles
No full textIt is known that a variety of economic time series exhibit asymmetry in the sense that the arrival of a recession is prompt, while the recovery from a recession appears protracted. This paper provides an explanation for the asymmetric movement of economic time series over business cycles by considering learning and information aggregation, given risk aversion on the part of economic agents. A model is constructed in which the underlying state of nature changes according to a symmetric first-order Markov process. Risk-averse agents make capital utilization choices which partially reveal their private information on the underlying state of nature. Risk aversion prevents them from acting promptly on receiving good news, while it encourages them to act quickly on receiving bad news. When this cautious response at the individual level is combined with aggregate noise, an economy-wide asymmetric time series is generated. A numerical simulation is carried out to derive the empirical distribution of movements of such a time series.Journal of Economic LiteratureClassification Numbers: D83, E32, E37
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