Information Cascades and Threshold Implementation

62 Pages Posted: 4 Mar 2019

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management

Yizhou Xiao

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2019

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 thresholds in a classic model of information cascade. We find that early supporters tap the wisdom of a later "gate-keeper" and effectively delegate their decisions, leading to uni-directional cascades and preventing agents' herding on rejections. Consequently, entrepreneurs or project proposers can charge supporters higher fees, and proposal feasibility, project selection, and information production all improve, even when agents have the option to wait. Novel to the literature, equilibrium outcomes depend on the crowd size, and in the limit, efficient project implementation and full information aggregation ensue.

Keywords: All-or-nothing, Capital Markets, Crowd-funding, Dynamic Learning, Entrepreneurship, FinTech Platform, Information Aggregation, Information Cascade

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

Suggested Citation

Cong, Lin and Xiao, Yizhou, Information Cascades and Threshold Implementation (February 15, 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-30. Available at SSRN: https://ssrn.com/abstract=3345352 or http://dx.doi.org/10.2139/ssrn.3345352

Lin Cong (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.linwilliamcong.com/

Yizhou Xiao

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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