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Open Economies Review

, Volume 23, Issue 5, pp 823–846 | Cite as

Third-person Effect and Financial Contagion in the Context of a Global Game

  • Tai-kuang HoEmail author
  • Ming-yen Wu
Research Article

Abstract

In this paper we present a psychological channel of financial contagion. We incorporate this new channel of financial contagion in the global game. Our basic assumption is that agents are overestimating the influence of negative messages they ascribe to others, and are thus acting on the basis of this perception. We resort to the psychological studies on the so-called third-person effect to justify this assumption. We show that the third-person effect is rationalizable. Our model has the feature that a crisis in a foreign country can be transmitted to the domestic country, even though there has been no changes in domestic fundamentals. Our model also provides intuitive explanations to the empirical observations that many governments have lost in a confidence game in the past crisis episodes.

Keywords

Global game Financial contagion Third-person effect 

JEL Classification

C72 G15 G18 

Notes

Acknowledgements

The authors thank Shyh-fang Ueng, Jen-hung Wang and Kuo-chun Yeh for helpful discussions. The authors thank editor George S. Tavlas and an anonymous referee for their insightful comments and suggestions. Financial support from Taiwan’s National Science Council NSC 96-2415-H-194-006 is acknowledged.

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of Quantitative FinanceNational Tsing Hua UniversityHsinchuTaiwan

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