Investment Busts, Reputation, and the Temptation to Blend in with the Crowd
Posted: 20 Mar 2012 Last revised: 2 Oct 2017
Date Written: May 28, 2013
We provide a real-options model of an industry in which agents time abandonment of their projects in an effort to protect their reputations. Agents delay abandonment attempting to signal their quality. When a public common shock forces abandonment of a small fraction of projects irrespective of agents' quality, many agents abandon their projects strategically even if they are unaffected by the shock. Such "blending in with the crowd" effect creates an additional incentive to delay abandonment ahead of the shock, leading to accumulation of "living dead" projects, which further amplifies the shock. The potential for moderate public common shocks often improves agents' values.
Keywords: abandonment, real options, signaling, asymmetric information, reputation
JEL Classification: D81, D82, G31, G33
Suggested Citation: Suggested Citation