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Coordination and Social Learning

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  • Chong Huang

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    (Department of Economics, University of Pennsylvania)

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    Abstract

    This paper studies the interaction between coordination and social learning in a dynamic regime change game. Social learning provides public information to which players overreact due to the coordination motive. So coordination affects the aggregation of private signals through players' optimal choices. Such endogenous provision of public information results in inefficient herds with positive probability, even though private signals have an unbounded likelihood ratio property. Therefore, social learning is a source of coordination failure. An extension shows that if players could individually learn, inefficient herding disappears, and thus coordination is successful almost surely. This paper also demonstrates that along the same history, the belief convergence differs in different equilibria. Finally, social learning can lead to higher social welfare when the fundamentals are bad.

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    File URL: http://economics.sas.upenn.edu/system/files/11-021.pdf
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    Bibliographic Info

    Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-021.

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    Length: 32 pages
    Date of creation: 05 Aug 2011
    Date of revision:
    Handle: RePEc:pen:papers:11-021

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    Related research

    Keywords: Coordination; social learning; inefficient herding; dynamic global game; common belief;

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    1. Heidhues, Paul & Melissas, Nicolas, 2005. "Equilibria in a Dynamic Global Game: The Role of Cohort Effects," CEPR Discussion Papers 4995, C.E.P.R. Discussion Papers.
    2. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
    3. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
    4. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    5. Lones Smith & Peter Sorensen, 2000. "Pathological Outcomes of Observational Learning," Econometrica, Econometric Society, vol. 68(2), pages 371-398, March.
    6. Stephen Morris & Hyun Song Shin, 1999. "Coordination Risk and the Price of Debt," Cowles Foundation Discussion Papers 1241R, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
    7. Martin W. Cripps & Jeffrey C. Ely & George J. Mailath & Larry Samuelson, 2006. "Common Learning," Cowles Foundation Discussion Papers 1575, Cowles Foundation for Research in Economics, Yale University.
      • Martin W. Cripps & Jeffrey C. Ely & George J. Mailath & Larry Samuelson, 2008. "Common Learning," Econometrica, Econometric Society, vol. 76(4), pages 909-933, 07.
    8. 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.
    9. 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.
    10. 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.
    11. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
    12. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, 07.
    13. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
    14. Mathias Dewatripont & Lars Peter Hansen & Stephen Turnovsky, 2003. "Advances in economics and econometrics: the eighth world congress," ULB Institutional Repository 2013/9557, ULB -- Universite Libre de Bruxelles.
    15. Flavio Toxvaerd & Chryssi Giannitsarou, 2004. "Recursive global games," Money Macro and Finance (MMF) Research Group Conference 2003 104, Money Macro and Finance Research Group.
    16. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
    17. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
    18. Chris Edmond, 2013. "Information Manipulation, Coordination, and Regime Change," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1422-1458.
    19. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity, and the Timing of Attacks," Econometrica, Econometric Society, vol. 75(3), pages 711-756, 05.
    20. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
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