Models of herd behaviour and informational cascades were theoretically developed in 1992 respectively by Banerjee (A simple model of herd behavior) and Bikhchandani, Hirshleifer and Welch (A Theory of Fads, Fashion, Custom and Cultural Change as Informational Cascades). Both articles pointed out the existence of an information externality that causes a welfare loss, and both proposed the idea that destroying an amount of information may turn out in a social improvement. Although this is an old idea and in the last years many features of herd behaviour and informational cascades were studied, this particular aspect was never developed or extensively analysed. In this article we will try to investigate this hypothesis both theoretically and experimentally.
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Paper provided by EconWPA in its series Experimental with number
0503002.
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