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Congested Observational Learning

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Author Info

  • Erik Eyster
  • Andrea Galeotti

    ()

  • Navin Kartik
  • Matthew Rabin

Abstract

We study observational learning in environments with congestion costs: as more of one's predecessors choose an action, the payoff from choosing that action decreases. If congestion on either action can get so large that an agent would prefer to take the other action no matter his beliefs about the state, then herds cannot occur. To the extent that \switching" away from the more popular action also reveals some private information, social learning is improved. The absence of herding is not enough to guarantee complete learning, however, as information cascades can occur through perpetual but uninformative switching between actions. For bounded private beliefs, we provide conditions that guarantee complete learning and conditions that guarantee bounded learning. Congestion costs have ambiguous effects on welfare as measured by the proportion of agents who choose the superior action. We apply our results to markets where congestion costs arise through responsive pricing and to queuing problems where agents dislike waiting for service.

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Bibliographic Info

Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 706.

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Date of creation: 01 Mar 2012
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Handle: RePEc:esx:essedp:706

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  1. S. Ali & Navin Kartik, 2012. "Herding with collective preferences," Economic Theory, Springer, vol. 51(3), pages 601-626, November.
  2. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
  3. Zvika Neeman & Gerhard O. Orosel, 1998. "Herding and the Winner’s Curse in Markets with Sequential Bidders," Papers 0092, Boston University - Industry Studies Programme.
  4. Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2006. "Parimutuel Betting under Asymmetric Information," Papers on Strategic Interaction 2006-05, Max Planck Institute of Economics, Strategic Interaction Group.
  5. Jacob Goeree & Thomas Palfrey & Brian Rogers, 2006. "Social learning with private and common values," Economic Theory, Springer, vol. 28(2), pages 245-264, 06.
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