Nicolas Melissas

Informational cascades elicit private information

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 truth-telling 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 senders information, the higher her incentives to truthfully reveal her private information.

Technology Adoption, Social Learning, and Economic Policy

We study a two-player dynamic investment model with information externalities and provide necessary and sufficient conditions for a unique switching equilibrium. Within this setup, we ask whether policymakers should interfere when better informed agents make individual investment decisions. We find that when the public information is sufficiently high and a social planer therefore expects an investment boom, investments should be taxed. Conversely, any positive investment tax is suboptimally high if the public information is sufficiently unfavorable. We also show that an investment tax may increase overall investment activity.