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Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare

Daniel Sgroi

Economics Papers from Economics Group, Nuffield College, University of Oxford

Abstract: Herding arises when an agent's private informationis swamped by public information in what Jackson and Kalai (1997) call a recurring game. The agent will fail to reveal his own information and will follow the actions of his predecessor and, as a result, useful information is lost, which might have highlighted a better choice for later decision-makers. This paper evaluates the strategy of forcing a sub-set of agents to make their decision early from the perspective of a social planner, and a firm with a valuable or valueless procuct. Promotional activity by firms can be explained as an attemps to overcome the herd externality and maximize sales.

Keywords: HERDING; INFORMATIONAL CASCADES; LEARNING; SOCIAL WELFARE; PROMOTIONAL COMPAIGNS (search for similar items in EconPapers)
JEL-codes: D82 D83 L15 (search for similar items in EconPapers)
Date: 2000
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