Riding free on the signals of others

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