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The Consequences of Endogenizing Information for Herd Behavior

Author

Listed:
  • Otto H. Swank

    (Faculty of Economics, Erasmus University Rotterdam)

  • Bauke Visser

    (Faculty of Economics, Erasmus University Rotterdam)

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 thatintroducing costly effort to become informed about project payoffs (i) eliminates herdbehaviour and (ii) shifts attention from the incentives for agent 2 to herd to agent 1 to exerteffort. While the first agent anticipates the second agent's behaviour, his influence is onlypartial. The unique equilibrium either implies delegation to the first agent; to the secondagent; or has both agents participating.

Suggested Citation

  • Otto H. Swank & Bauke Visser, 2003. "The Consequences of Endogenizing Information for Herd Behavior," Tinbergen Institute Discussion Papers 03-021/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20030021
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    More about this item

    Keywords

    Reputation; herd behaviour; information collection.;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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