Information Cascades and Threshold Implementation
62 Pages Posted: 4 Mar 2019
Date Written: February 15, 2019
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: Suggested Citation