How do market prices and cheap talk affect coordination?

Hong Qu

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

In many scenarios such as banking and liquidity crises, inefficiencies often arise because investors face uncertainties about economic fundamentals and the strategies of other investors. How information affects fundamental uncertainty is well studied, but how information affects strategic uncertainty is underexplored. This paper examines how two communication mechanisms, market and cheap talk, affect investment decisions and efficiency in an experimental investment game with both fundamental and strategic uncertainty. I find that the market does not improve coordination because the expectation that coordination failures will occur is self-fulfilling, while cheap talk improves coordination because the signals of willingness to invest alleviate strategic uncertainty.

Original languageEnglish (US)
Pages (from-to)1221-1260
Number of pages40
JournalJournal of Accounting Research
Volume51
Issue number5
DOIs
StatePublished - Dec 1 2013

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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