An enduring debate in Economics, with important public policy implications, is whether markets efficiently aggregate the information that is held by individual decision makers like investors or corporations, and whether efficient allocations are the result. For example, do businesses delay profitable investments in new technologies, because it is more profitable for them to wait, observe market activity, and learn something about the information of others? If too many businesses adopt a delay strategy, will the lack of investment wrongly convince market participants that other businesses view investment as unprofitable?
This research will investigate these sorts of questions, in the context of a simple investment game. Of central importance are the inferences investors make about the information of other investors. When one player invests, others must disentangle the possibility that the player has favorable information about everyone's investment returns, and the possibility that investment is favorable only for that player (due to low investment costs). Investors face a tradeoff between the desire to start earning profits earlier by investing right away, and the temptation to delay investment in order to learn from others. The research uses both theoretical and experimental methodologies. Understanding the economic incentives and psychological motivations may suggest effective policy tools that encourage more efficient dispersion of information, thereby allowing markets to be more efficient.
