Information Cascades and the Bimodal Distribution of Economic Recessions in the United States

The phenomenon of information cascades is widely observed in economic and social systems. In a highly connected random network of interacting agents whose decisions are determined by the actions of their neighbours according to a simple threshold rule, the size distribution of cascades is bimodal. There is an exponential tail at small cascade size and a second peak at the size of the entire system corresponding to a single global cascade. The American economy can be thought of as a highly connected network in terms of both its technological and informational connections. The cumulative size of economic recessions, the fall in output from peak to trough, is analysed for the US economy 1900-2002. A least squares fit of an exponential relationship between size and the rank of size gives a good description of most of the data. But the observation for the Great Depression of the 1930s stands out as a very distinct outlier. In other words, we observe a bimodal relationship of the type predicted by theory.