Herding with costly information and signal extraction
Costly signal acquisition compels decision-makers to choose between acquiring private signals and following their predecessors, which can result in problems associated with signal extraction. The results show that the information externality of the second decision-maker influences the efficiency of herd behavior among subsequent decision-makers. If the second decision-maker acts differently than his predecessor, the followers take a free ride on his signal acquisition and act correctly. However, if the second investor acts in the same manner as his predecessor, the followers will acquire the costly signals only if the precision of their private signals is significant, otherwise herding is inefficient.
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