INFORMATIONAL CASCADES ELICIT PRIVATE INFORMATION∗

We introduce cheap talk in a dynamic investment model with information externalities.We first show how social learning adversely affects the credibility of cheap talk messages. Next, we show how an informational cascade makes truthtelling incentive compatible.Aseparating equilibrium only exists for high-surplus projects. Both an investment subsidy and an investment tax can increase welfare. The more precise the sender’s information, the higher her incentives to truthfully reveal her private information.