Abstract
In this paper we present a psychological channel of financial contagion. We incorporate this new channel of financial contagion in the global game. Our basic assumption is that agents are overestimating the influence of negative messages they ascribe to others, and are thus acting on the basis of this perception. We resort to the psychological studies on the so-called third-person effect to justify this assumption. We show that the third-person effect is rationalizable. Our model has the feature that a crisis in a foreign country can be transmitted to the domestic country, even though there has been no changes in domestic fundamentals. Our model also provides intuitive explanations to the empirical observations that many governments have lost in a confidence game in the past crisis episodes.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.