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BH-7: Herding and Externalities
Information Cascades and Investment Efficiency in Peer-to-Peer Markets
1University of New South Wales; 2Chinese University of Hong Kong
Using bid-level data from a large U.S. p2p lending platform, we show that the p2p market does not aggregate investors' information efficiently. This inefficiency distorts the relation between project quality and the amount of capital the project attracts. The information cascade mechanism is responsible for this effect. When early lenders act on noisy information, this noise is amplified by followers instead of being cancelled out. This result holds even when herding is rational, but limited rationality, such as naïve interpretation of equilibrium variables, further distorts capital allocation. We find evidence of such limited rationality and show that propensity to herd is a persistent lender characteristic. Overall, we establish that the transparency of prior capital commitment inherent in p2p markets can result in reduced investment efficiency.
Evidence about Bubble Mechanisms: Precipitating Event, Feedback Trading, and Social Contagion
1University of Illinois at Urbana-Champaign; 2Tsinghua University; 3University of Durham
Shiller’s feedback loop theory of bubbles involves three elements: a precipitating event that causes an increase in prices, positive feedback trading, and social contagion that draws in new investors. We use brokerage account records from a large Chinese stock brokerage firm to show that all three components of the Shiller feedback loop are found during the Chinese put warrants bubble. An increase in the stock transaction tax made warrants relatively more attractive for speculative trading and was the precipitating event for the extreme phase of the bubble, causing immediate sharp increases in trading by new and existing investors and a jump in warrant prices. Hazard rate regressions show that there was positive feedback trading, and the period of heavy feedback trading coincided with the extreme phase of the bubble following the increase in the transaction tax. Proxies for social contagion explain the entry of new investors, and estimates of the trading volume due to feedback trading and the numbers of new investors drawn in by social contagion help explain the size of the bubble.
Financial Literacy Externalities
1Goethe University Frankfurt, CEPR; 2Sveriges Riksbank; 3Erasmus University Rotterdam, CEPR
This paper uses unique administrative data and a quasi-field experiment of exogenous allocation of refugees in Sweden to estimate effects of exposure to financially literate neighbors on household financial behavior. The paper contributes evidence of a causal impact of financial literacy on behavior and points to a social multiplier of financial education initiatives. Exposure promotes saving for retirement in the medium run and stockholding in the longer run, more so when neighbors have economics or business education. Significant effects are only observed on educated or male-headed households. Findings point strongly to transfer of knowledge rather than mere imitation. They are relevant both for financial education and for refugee placement policies.
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Conference: EFA 2017
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