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In a Herd? Herding with costly observation and an unknown number of predecessors

Author

Listed:
  • Mats Godenhielm

    () (Department of Economics, University of Helsinki)

  • Klaus Kultti

    () (Department of Economics, University of Helsinki)

Abstract

We consider a sequential decision to adopt/not adopt a technology in a herding environment with costly observation. The novelty compared to the previous models on herding with costly observation, such as Kultti and Miettinen (2006a), is that the agents do not know how many other agents have been in the same situation earlier. It turns out that herding no longer arises deterministically. We show that when observation costs are low there exists a unique symmetric pure strategy equilibrium where all agents observe the actions of two immediate predecessors in order to find out whether they are in a herd or not.

Suggested Citation

  • Mats Godenhielm & Klaus Kultti, 2008. "In a Herd? Herding with costly observation and an unknown number of predecessors," Finnish Economic Papers, Finnish Economic Association, vol. 21(2), pages 95-103, Autumn.
  • Handle: RePEc:fep:journl:v:21:y:2008:i:2:p:95-103
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    References listed on IDEAS

    as
    1. Kultti Klaus K & Miettinen Paavo A, 2007. "Herding with Costly Observation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-16, July.
    2. 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.
    3. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
    4. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, March.
    5. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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