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Herd behaviour, strategic complementarities and technology adoption

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  • VERGARI, Cecilia

Abstract

In technology adoption, herd behaviour can lead to a suboptimal outcome. An example is given by Choi (1997): it is a model of technology choice under uncertainty where herding arises because of strategic complementarities and risk aversion. It causes a positive experimenting bias against the adoption of a more efficient (in terms of expected value) technology. We introduce in his model an additional element upon which firms base their technology decision: the economic environment. We investigate how this additional source of uncertainty can affect herding and so the efficiency of the technology choice. The result is that, under certain conditions, the experimenting bias decreases and in the limit it is possible to induce firms to experiment with the new technology thus improving social welfare.

Suggested Citation

  • VERGARI, Cecilia, 2004. "Herd behaviour, strategic complementarities and technology adoption," CORE Discussion Papers 2004063, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2004063
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-2004.html
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    References listed on IDEAS

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    1. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
    2. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-1085, September.
    3. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2004. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 87-113.
    4. Amil Dasgupta, 2000. "Social Learning with Payoff Complementarities," Econometric Society World Congress 2000 Contributed Papers 0322, Econometric Society.
    5. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
    6. Nicolas Melissas, 2005. "Herd behaviour as an incentive scheme," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(3), pages 517-536, October.
    7. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2002. "The Role of Large Players in Currency Crises," NBER Chapters,in: Preventing Currency Crises in Emerging Markets, pages 197-268 National Bureau of Economic Research, Inc.
    8. 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.
    9. Jay Pil Choi, 1997. "Herd Behavior, the 'Penguin Effect,' and the Suppression of Informational Diffusion: An Analysis of Informational Externalities and Payoff Interdependency," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 407-425, Autumn.
    10. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
    11. COLLA, Paolo & GARCIA, Filomena, 2004. "Technology adoption with forward looking agents," CORE Discussion Papers 2004041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    Cited by:

    1. Drehmann, Mathias & Oechssler, Jorg & Roider, Andreas, 2007. "Herding with and without payoff externalities -- an internet experiment," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 391-415, April.
    2. Müller, Tobias & Shaikh, Mujaheed, 2016. "Your Retirement and My Health Behaviour: Evidence on Retirement Externalities from a Fuzzy Regression Discontinuity Design," MPRA Paper 70843, University Library of Munich, Germany.

    More about this item

    Keywords

    herding; information and network externalities; public information social learning; technology adoption;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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