The Consequences of Endogenizing Information for Herd Behavior

Otto Swank () and Bauke Visser

No 03-021/1, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: In models of sequential decision making herd behaviour occurs if the signals smart(dumb) agents receive are (un)correlated and if agents have reputational concerns. We show thatintroducing costly effort to become informed about project payoffs (i) eliminates herdbehaviour and (ii) shifts attention from the incentives for agent 2 to herd to agent 1 to exerteffort. While the first agent anticipates the second agent's behaviour, his influence is onlypartial. The unique equilibrium either implies delegation to the first agent; to the secondagent; or has both agents participating.

Keywords: Reputation; herd behaviour; information collection. (search for similar items in EconPapers)
JEL-codes: D72 D82 (search for similar items in EconPapers)
Date: 2003-03-14
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