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Insufficient Experimentation Because Agents Herd

Author

Listed:
  • Kimiko Terai

    (Faculty of Economics, Keio University)

  • Amihai Glazer

    (Department of Economics, University of California, Irvine)

Abstract

Consider a principal (say a central government) which allocates a fixed budget among multiple agents (say local governments). Each agent chooses a policy or technology. After observing the success or failure of each agent, the principal allocates a larger share of the budget to agents who succeeded than to those who failed. Under these conditions, a Nash equilibrium may have all agents herd, all choosing the same technology, even though the principal would prefer that they experiment, with different agents choosing different technologies. Relatedly, under some conditions all risk-averse agents may choose a technology whose outcome is risky, over a technology whose outcome is certain.

Suggested Citation

  • Kimiko Terai & Amihai Glazer, 2014. "Insufficient Experimentation Because Agents Herd," Keio-IES Discussion Paper Series 2014-008, Institute for Economics Studies, Keio University.
    • Handle: RePEc:keo:dpaper:2014-008
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    File URL: http://ies.keio.ac.jp/upload/pdf/en/DP2014-008.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Delegation; herd behavior; risk-aversion; fiscal decentralization; policy innovation resource allocation in organizations;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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