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When half the truth is better than the truth: A Theory of aggregate information cascades

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Author Info

  • Antonio Guarino

    (University College London)

  • Steffen Huck

    (University College London)

  • Heike Harmgart

    (European Bank for Reconstruction and Development(EBRD))

Abstract

We introduce a new model of aggregate information cascades where only one of two possible actions is observable to others. When called upon, agents (who decide in some random order that they do not know) are only informed about the total number of others who have chosen the observable action before them. This informational structure arises nat- urally in many applications. Our most important result is that only one type of cascade arises in equilibrium, the aggregate cascade on the observable action. A cascade on the unobservable action never arises. Our results may have important policy consequences. Central agencies, for example in the health sector, may optimally decide to withhold in- formation from the public.

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Bibliographic Info

Paper provided by ESRC World Economy and Finance Research Programme, Birkbeck, University of London in its series WEF Working Papers with number 0046.

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Date of creation: Oct 2008
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Handle: RePEc:wef:wpaper:0046

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References

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  1. Jacob Goeree & Thomas Palfrey & Brian Rogers, 2004. "Self-Correcting Information Cascades," Levine's Bibliography 122247000000000153, UCLA Department of Economics.
  2. Guarino, Antonio & Harmgart, Heike & Huck, Steffen, 2011. "Aggregate information cascades," Games and Economic Behavior, Elsevier, vol. 73(1), pages 167-185, September.
  3. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  4. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
  5. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, 04.
  6. Huck, Steffen & Oechssler, Jorg, 2000. "Informational cascades in the laboratory: Do they occur for the right reasons?," Journal of Economic Psychology, Elsevier, vol. 21(6), pages 661-671, December.
  7. Dorothea Kübler & Georg Weizsäcker, 2005. "Are Longer Cascades More Stable?," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 330-339, 04/05.
  8. Dorothea K¸bler & Georg Weizs”cker, 2004. "Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 425-441, 04.
  9. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  10. Xavier Vives, 2007. "Information and Learning in Markets," Levine's Bibliography 122247000000001520, UCLA Department of Economics.
  11. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
  12. Abhijit Banerjee & Drew Fudenberg, 2010. "Word of Mouth Learning," Levine's Working Paper Archive 723, David K. Levine.
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Cited by:
  1. Antonio Guarino & Philippe Jehiel, 2009. "Social Leanring with Course Inference," WEF Working Papers 0050, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  2. Antonio Guarino & Philippe Jehie, 2009. "Social Learning with Coarse Inference," Levine's Working Paper Archive 814577000000000292, David K. Levine.
  3. Antonio Guarino & Antonella Ianni, 2010. "Bayesian Social Learning with Local Interactions," Games, MDPI, Open Access Journal, vol. 1(4), pages 438-458, October.

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