6 - Delays

Summary

Does the waiting game end with a bang or a whimper?

Each agent chooses when to invest (if at all) and observes the number of investments by others in each period. That number provides a signal on the private information of other agents about the state of nature. The waiting game has in general multiple equilibria. An equilibrium depends on the intertemporal arbitrage between the opportunity cost of delay and the value of the information that is gained from more observations. The informational externality generates strategic substitutabilities and complementarities. Multiple equilibria appear, which exhibit a rush of activity or delays and generate a small or large amount of information. The convergence of beliefs and the occurrence of herds are analyzed under a variety of assumptions about the boundedness of the distribution of private beliefs, the number of agents, the existence of an observation noise, the length of the periods, and the discreteness of investment decisions.

In 1993, the U.S. economy was in a shaky recovery from the previous recession. The optimism after some good news was dampened by a few pieces of bad news, raised again by other news, and so on. In the trough of the business cycle, each agent is waiting for some good news about an upswing. What kind of news? Some count occupancy rates in the first-class sections of airplanes. Others weigh the newspapers to evaluate the volume of ads. Housing starts and expenditures on durables are standard indicators to watch. The news is the actions of other agents. Everyone could be waiting because everyone is waiting in an “economics of wait and see” (Nasar, 1993).