RIDING FREE ON THE SIGNALS OF OTHERS

This paper looks at the incentives to free-ride on the information sig naling of others and shows how this can lead to delay in productive ac tivity and to a cascade of activity once information is signaled. In t he presence of increasing returns to scale to a profitable project, an initial pioneer may have to incur short-term losses to signal the opp ortunity to others. Agents may prefer to defer entry in the hope that others will incur those losses and thereby convey the information. Fre e-riding is worsened when potential entrants must first choose to acqu ire a signal about the project, even a costless signal, and this infor mation acquisition is observed. (C) 1998 Elsevier Science S.A.