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Herding With Costly Information

Author

Listed:
  • KLAUS KULTTI

    (Department of Economics, University of Helsinki, P.O. Box 17, Arkadiankatu 7, 00014, Finland)

  • PAAVO MIETTINEN

    (Finnish Doctoral Programme in Economics, University of Helsinki, P.O. Box 17, Arkadiankatu 7, 00014, Finland;
    Department of Economics, University of Helsinki, P.O. Box 17, Arkadiankatu 7, 00014, Finland)

Abstract

We consider a standard sequential decision to adopt/buy a good in a herding environment. The setup is same as in Sgroi (2002). Contrary to the basic herding case we introduce a cost that the agents have to pay for the information about their predecessors' actions. All agents receive informative signals as in the standard herding models but do not view the actions taken by their predecessors unless they pay the observation costs. In this set up the first and the second agents rely on their own signals when they make the decision to adopt/buy the good. Only the third agent is willing to buy the information on all of the preceding agents' actions. All agents following the third agent buy information on only one agent's action and decide to adopt/buy the good after updating their beliefs. What follows is that the two first agents' actions determine whether the rest of the agents will adopt/buy the good or not when information about the predecessors' actions is cheap enough. If the cost of the information about the predecessors' actions is very expensive then all the agents will act according to their own signals. If observing is free one gets the standard results. In essence we identify a discontinuity in the basic herding model since the herding arises deterministically when a small observation cost is introduced.

Suggested Citation

  • Klaus Kultti & Paavo Miettinen, 2006. "Herding With Costly Information," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 21-31.
    • Handle: RePEc:wsi:igtrxx:v:08:y:2006:i:01:n:s021919890600076x
    DOI: 10.1142/S021919890600076X
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    Citations

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    Cited by:

    1. Diefeng Peng & Yulei Rao & Xianming Sun & Erte Xiao, 2019. "Optional Disclosure and Observational Learning," Monash Economics Working Papers 05-18, Monash University, Department of Economics.
    2. Yang, Wan-Ru, 2011. "Herding with costly information and signal extraction," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 624-632, October.
    3. Partha Gangopadhyay, 2011. "Decision Making in Ignorance and Consequent Market Outcomes: Equilibrium Analysis," Modern Applied Science, Canadian Center of Science and Education, vol. 5(3), pages 1-3, June.
    4. Hsieh, Shu-Fan & Chan, Chia-Ying & Wang, Ming-Chun, 2020. "Retail investor attention and herding behavior," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 109-132.
    5. Yoon, Young-Ro, 2015. "Strategic behavior in acquiring and revealing costly private information," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 133-148.
    6. Mats Godenhielm & Klaus Kultti, 2008. "In a Herd? Herding with costly observation and an unknown number of predecessors," Finnish Economic Papers, Finnish Economic Association, vol. 21(2), pages 95-103, Autumn.
    7. Harry Pei, 2020. "Reputation Building under Observational Learning," Papers 2006.08068, arXiv.org, revised Nov 2020.
    8. Song, Yangbo, 2016. "Social learning with endogenous observation," Journal of Economic Theory, Elsevier, vol. 166(C), pages 324-333.

    More about this item

    Keywords

    Herding; Information acquisition; Subject Classification: 91A20; Subject Classification: 91A80;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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