Riding free on the signals of others

Kim Alexander-Cook, Dan Bernhardt, Joanne Roberts

Research output: Contribution to journalArticle

Abstract

This paper looks at the incentives to free-ride on the information signaling of others and shows how this can lead to delay in productive activity and to a cascade of activity once information is signaled. In the presence of increasing returns to scale to a profitable project, an initial pioneer may have to incur short-term losses to signal the opportunity to others. Agents may prefer to defer entry in the hope that others will incur those losses and thereby convey the information. Free-riding is worsened when potential entrants must first choose to acquire a signal about the project, even a costless signal, and this information acquisition is observed.

Original languageEnglish (US)
Pages (from-to)25-43
Number of pages19
JournalJournal of Public Economics
Volume67
Issue number1
DOIs
StatePublished - Jan 1 1998
Externally publishedYes

Keywords

  • D82
  • Free-riding signaling
  • Incomplete information
  • Increasing returns to scale

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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