Aggregate Uncertainty Can Lead to Incorrect Herds

Ignacio Monzon

American Economic Journal: Microeconomics, 2017, vol. 9, issue 2, 295-314

Abstract: A continuum of homogeneous rational agents choose between two competing technologies. Agents observe a private signal and sample others' previous choices. Signals have an aggregate component of uncertainty, so aggregate behavior does not necessarily reflect the true state of nature. Nonetheless, agents still find others' choices informative, and base their decisions partly on others' behavior. Consequently, bad choices can be perpetuated: aggregate uncertainty makes agents herd on the inferior technology with positive probability. I derive the optimal decision rule when agents sample exactly two individuals. I also present examples with herds on the inferior technology for arbitrarily large sample sizes.

JEL-codes: C72 D83 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mic.20140212
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Citations: View citations in EconPapers (1)

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Working Paper: Aggregate Uncertainty Can Lead to Herds (2012)
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