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The Consequences of Endogenizing Information for Herd Behavior

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Author Info
Otto H. Swank () (Faculty of Economics, Erasmus University Rotterdam)
Bauke Visser () (Faculty of Economics, Erasmus University Rotterdam)

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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.

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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-021/1.

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Date of creation: 14 Mar 2003
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Handle: RePEc:dgr:uvatin:20030021

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Web page: http://www.tinbergen.nl/

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Related research
Keywords: Reputation; herd behaviour; information collection.;

Find related papers by JEL classification:
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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This page was last updated on 2009-12-3.

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