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By Yi Zhang, Christian Hellwig, David K. Levine, John Riley, Leeat Yariv and William Zame

Abstract

When making sequential decisions under imperfect information, one may learn from other people’s choices. Herding occurs when people ignore their own information and follow their predecessors. Consequently, their decisions are uninformative to others, which prevents information aggregation. Therefore, the initial realization of signals can have long-term consequences and herd behavior is often error prone. We analyze an endogenous ordering sequential decision model with one-sided commitment in which decision makers are allowed to choose the time of acting or waiting. We characterize herd behavior under endogenous ordering and compare it with herd behavior under exogenous ordering, in which only one decision maker moves at each period in an exogenously given order. We then show that with endogenous ordering, if decision makers are patient enough, at any fixed time, nearly all decision makers wait due to the negligible information disclosed. In this case, if decision makers can be forced to move with an exogenous order, the resulting equilibrium is more efficient because exogenous ordering tends to aggregate more information

Topics: Herding, Endogenous Ordering, Exogenous Ordering, One-Sided
Year: 2006
OAI identifier: oai:CiteSeerX.psu:10.1.1.415.4344
Provided by: CiteSeerX
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