Information Cascades and Threshold Implementation

60 Pages Posted: 22 Feb 2018 Last revised: 21 Oct 2018

See all articles by Lin William Cong

Lin William Cong

University of Chicago - Booth School of Business

Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: October 15, 2018

Abstract

Economic activities such as crowdfunding often involve sequential interactions, observational learning, and project implementation contingent on achieving certain thresholds of support. We incorporate endogenous all-or-nothing (AoN) thresholds in a classical model of information cascade. Relative to standard settings, we find that the AoN feature effectively delegates early supporters' downside protection to a later 'gate-keeper,' leads to uni-directional cascades and prevents agents' herding on rejections. Consequently, information aggregation improves, and issuance becomes less under-priced, even when agents have the options to wait. More generally, endogenous AoN thresholds improve the financing efficiency of costly projects and the harnessing of decentralized information, and approaches the first-best information production and project selection as the crowd grows large.

Keywords: Information Cascade, Crowd-funding, All-or-nothing, Entrepreneurial Finance, Capital Markets, Information Aggregation.

JEL Classification: D81, D83, G12, G14, L26

Suggested Citation

Cong, Lin and Xiao, Yizhou, Information Cascades and Threshold Implementation (October 15, 2018). 2nd Emerging Trends in Entrepreneurial Finance Conference. Available at SSRN: https://ssrn.com/abstract=3030573 or http://dx.doi.org/10.2139/ssrn.3030573

Lin Cong

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Yizhou Xiao (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/yizhouxiao/

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