The Consequences of Endogenizing Information for Herd Behavior

Tinbergen Institute Discussion Paper No. 03-021/1

20 Pages Posted: 13 May 2003

See all articles by Otto H. Swank

Otto H. Swank

Erasmus University Rotterdam - Department of Economics; Tinbergen Institute Rotterdam (TIR)

Bauke Visser

Erasmus University Rotterdam - Department of Economics; Tinbergen Institute Rotterdam (TIR)

Date Written: March 14, 2003

Abstract

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

Swank, Otto H. and Visser, Bauke, The Consequences of Endogenizing Information for Herd Behavior (March 14, 2003). Tinbergen Institute Discussion Paper No. 03-021/1, Available at SSRN: https://ssrn.com/abstract=389320 or http://dx.doi.org/10.2139/ssrn.389320

Otto H. Swank

Erasmus University Rotterdam - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute Rotterdam (TIR)

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 4081448 (Phone)
+31 10 2120551 (Fax)

Bauke Visser (Contact Author)

Erasmus University Rotterdam - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+ 31 (0)10 40 81449 (81441) (Phone)
+ 31 (0)10 40 89149 (Fax)

Tinbergen Institute Rotterdam (TIR)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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