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Observational learning and firm dynamics

Author

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  • Zachary Mahone
  • Filippo Rebessi

Abstract

This article investigates the implications of observational learning for firm dynamics. Because consumers learn through past purchase decisions, monopolistic firms can induce information cascades through prices. We characterize when cascades arise and argue that the fragile nature of cascades is reflected in firm‐level data. We measure fragility using reversals: periods when a firm with historically stable revenues experiences a large, sudden change in earnings. We document a robust pattern that the frequency of reversals among stable firms declines with age, and show a calibration exercise delivers an untargeted age profile in line with the data. Finally, efficiency is discussed. Apprentissage par observation et dynamique des entreprises. Cet article étudie l'incidence de l'apprentissage par observation sur la dynamique des entreprises. Puisque les consommateurs apprennent de leurs décisions d'achat antérieures, les entreprises monopolistiques peuvent induire des cascades d'information par les prix. Nous caractérisons le moment où les cascades arrivent et soutenons que leur nature fragile se reflète dans les données d'entreprise. Nous mesurons la fragilité à l'aide de renversements : des périodes où une entreprise aux recettes historiquement stables vit un grand changement soudain dans ses gains. Nous documentons un modèle robuste où la fréquence des renversements au sein des entreprises stables décline avec l'âge, et montrons un exercice de calibration qui produit un profil d'âge non ciblé conforme aux données. Enfin, nous abordons l'efficience.

Suggested Citation

  • Zachary Mahone & Filippo Rebessi, 2024. "Observational learning and firm dynamics," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(3), pages 989-1027, August.
  • Handle: RePEc:wly:canjec:v:57:y:2024:i:3:p:989-1027
    DOI: 10.1111/caje.12729
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    References listed on IDEAS

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