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Economic Theory

, Volume 35, Issue 2, pp 367–379 | Cite as

The role of externalities and information aggregation in market collapse

  • Hikmet GunayEmail author
Research Article

Abstract

We examine the role that belief, network externality, and information aggregation play in inefficient market collapses. After receiving consecutive negative shocks, some ex-ante identical Bayesian agents will be discouraged about the unknown state of the market they invest; therefore, they will stop investing. This decision will have two effects: first, it will cause agents to aggregate information through social/observational learning; second, it will decrease the network externality effect. We show that there might be an inefficient market collapse if the externality effect diminishes too much, and the cost of re-entry to the market is too high. We also analyze the effects of strategic delay and experimentation on the exit decision of the agents.

Keywords

Social (observational) learning Information aggregation Strategic delay (waiting) Experimentation Coordination avalanche Optimal stopping 

JEL Classification Numbers

C72 D82 

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Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of ManitobaWinnipegCanada

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