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Experimental evidence on the "insidious" illiquidity risk

Author

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  • Damien Besancenot

    (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)

  • Radu Vranceanu

    (ESSEC Business School and THEMA (UMR 8184) - ESSEC Business School - THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

Abstract

This paper brings experimental evidence on investors' behavior subject to an "illiquidity" constraint, where the success of a risky project depends on the participation of a minimum number of investors. The experiment is set up as a frameless coordination game that replicates the investment context. Results confirm the insidious nature of the illiquidity risk: as long as a first illiquidity default does not occur, investors do not seem able to fully internalize it. After several defaults, agents manage to coordinate on a default probability above which they refuse to participate to the project. This default probability is lower than the default probability of the first illiquidity default.

Suggested Citation

  • Damien Besancenot & Radu Vranceanu, 2011. "Experimental evidence on the "insidious" illiquidity risk," CEPN Working Papers halshs-00602107, HAL.
    • Handle: RePEc:hal:cepnwp:halshs-00602107
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00602107
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    References listed on IDEAS

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    Keywords

    Coordination game; Illiquidity risk; Threshold strategy; Experimental economics;
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