Informational Herding, Optimal Experimentation, and Contrarianism

• Lones Smith ^[3] ; Peter Norman Sørensen ^[1] ; Jianrong Tian ^[2]
  1. [1] University of Copenhagen

     University of Copenhagen

     Dinamarca

     
  2. [2] University of Hong Kong

     University of Hong Kong

     RAE de Hong Kong (China)

     
  3. [3] University of Wisconsin

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• Localización: Review of economic studies, ISSN 0034-6527, Vol. 88, Nº 5, 2021, págs. 2527-2554
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • 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.