When half the truth is better than the truth: A Theory of aggregate information cascades

Antonio Guarino, Steffen Huck and Heike Harmgart ()

No 46, WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London

Abstract: We introduce a new model of aggregate information cascades where only one of two possible actions is observable to others. When called upon, agents (who decide in some random order that they do not know) are only informed about the total number of others who have chosen the observable action before them. This informational structure arises nat- urally in many applications. Our most important result is that only one type of cascade arises in equilibrium, the aggregate cascade on the observable action. A cascade on the unobservable action never arises. Our results may have important policy consequences. Central agencies, for example in the health sector, may optimally decide to withhold in- formation from the public.

Date: 2008-10
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