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Herd behaviour, strategic complementarities and technology adoption

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  • VERGARI, Cecilia

Abstract

In technology adoption, herd behaviour can lead to a suboptimal outcome. An example is given by Choi (1997): it is a model of technology choice under uncertainty where herding arises because of strategic complementarities and risk aversion. It causes a positive experimenting bias against the adoption of a more efficient (in terms of expected value) technology. We introduce in his model an additional element upon which firms base their technology decision: the economic environment. We investigate how this additional source of uncertainty can affect herding and so the efficiency of the technology choice. The result is that, under certain conditions, the experimenting bias decreases and in the limit it is possible to induce firms to experiment with the new technology thus improving social welfare.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2004063.

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Date of creation: 00 Sep 2004
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Handle: RePEc:cor:louvco:2004063

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Related research

Keywords: herding; information and network externalities; public information social learning; technology adoption;

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References

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  1. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2001. "The Role of Large Players in Currency Crises," NBER Working Papers 8303, National Bureau of Economic Research, Inc.
  2. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  3. Amil Dasgupta, 2000. "Social Learning with Payoff Complementarities," Econometric Society World Congress 2000 Contributed Papers 0322, Econometric Society.
  4. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
  5. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2004. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 87-113.
  6. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  7. Choi, J.P., 1994. "Herd behavior, the "Penguin effect", and the suppression of informational diffusion: An analysis of informational externalities and payoff interdependency," Discussion Paper 1994-62, Tilburg University, Center for Economic Research.
  8. Nicolas Melissas, 2005. "Herd behaviour as an incentive scheme," Economic Theory, Springer, vol. 26(3), pages 517-536, October.
  9. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
  10. COLLA, Paolo & GARCIA, Filomena, 2004. "Technology adoption with forward looking agents," CORE Discussion Papers 2004041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
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Cited by:
  1. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2004. "Herding with and without Payoff Externalities - An Internet Experiment," Bonn Econ Discussion Papers bgse15_2004, University of Bonn, Germany.

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