Informational Herding, Optimal Experimentation, and Contrarianism

The Market for “Lemons”: Quality Uncertainty and the Market Mechanism

Lones Smith, Peter Sørensen and Jianrong Tian

The Review of Economic Studies, 2021, vol. 88, issue 5, 2527-2554

Abstract: In the standard herding model, privately informed individuals sequentially see prior actions and then act. An identical action herd eventually starts and public beliefs tend to “cascade sets” where social learning stops. What behaviour is socially efficient when actions ignore informational externalities? We characterize the outcome that maximizes the discounted sum of utilities. Our four key findings are: (1) cascade sets shrink but do not vanish, and herding should occur but less readily as greater weight is attached to posterity. (2) An optimal mechanism rewards individuals mimicked by their successor. (3) Cascades cannot start after period one under a signal log-concavity condition. (4) Given this condition, efficient behaviour is contrarian, leaning against the myopically more popular actions in every period. We make two technical contributions: as value functions with learning are not smooth, we use monotone comparative statics under uncertainty to deduce optimal dynamic behaviour. We also adapt dynamic pivot mechanisms to Bayesian learning.

Keywords: Herding; Mimicking; Contrarian; Cascade; Efficiency; Monotonicity; Logconcavity; C73; D82; D83 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdab001 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:88:y:2021:i:5:p:2527-2554.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().