Information Cascades and Threshold Implementation
60 Pages Posted: 22 Feb 2018 Last revised: 21 Oct 2018
Date Written: October 15, 2018
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: Suggested Citation