The Consequences of Endogenizing Information for Herd Behavior
Tinbergen Institute Discussion Paper No. 03-021/1
20 Pages Posted: 13 May 2003
Date Written: March 14, 2003
In models of sequential decision making herd behaviour occurs if the signals smart (dumb) agents receive are (un)correlated and if agents have reputational concerns. We show that introducing costly effort to become informed about project payoffs (i) eliminates herd behaviour and (ii) shifts attention from the incentives for agent 2 to herd to agent 1 to exert effort. While the first agent anticipates the second agent's behaviour, his influence is only partial. The unique equilibrium either implies delegation to the first agent; to the second agent; or has both agents participating.
Keywords: Reputation, herd behaviour, information collection
JEL Classification: D72, D82
Suggested Citation: Suggested Citation