INFORMATION REVELATION AND STRATEGIC DELAY IN A MODEL OF INVESTMENT

We model investment as an N-player game with a pure informational exte rnality. Each player's payoff depends only on his own action and the s tate of nature. However, because a player's action reveals his private information, players wait to see what other players will do. Equilibr ium is inefficient because delay is costly and information is imperfec tly revealed. We characterize the unique symmetric perfect Bayesian eq uilibrium and study the robustness of delay, which turns out to be sen sitive to the reaction speed and the number of players. We establish t he following results. (i) When the period length is very short, the ga me ends very quickly and there is a form of herding or informational c ascade which results in a collapse of investment. (ii) As the period l ength increases, the possibility of herding disappears. (iii) As the n umber of players increases, the rate of investment and the information flow are eventually independent of the number of players; adding more players simply increases the number who delay. (iv) In the limit, the time-profile of investment is extreme, a period of low investment fol lowed either by an investment surge or a collapse.