Herding with Costly Information

We consider a standard sequential decision to adopt/buy a good in a herding environment. The setup is same as in Sgroi (2002). Contrary to the basic herding case we introduce a cost that the agents have to pay for the information about their predecessors’ actions. All agents receive informative signals as in the standard herding models but do not view the actions taken by their predecessors unless they pay the observation costs. In this set up the ...rst and the second agents rely on their own signals when they make the decision to buy/adopt the good. Only the third agent is willing to buy the information on all of the preceding agents’ actions. All agents following the third agent buy information on only one agent’s action and decide to adopt/buy the good after updating their beliefs. What follows is that the two ...rst agents’ actions determine whether the rest of the agents will buy/adopt the good or not when information about the predecessors’ actions is cheap enough. If the cost of the information about the predecessors’ actions is very expensive then all the agents will act according to their own signals. If observing is free one gets the standard results. Finally we compare welfare between the cases where information about the preceding agents’ actions has costs and the case where information about the actions is freely available. ¤We thank the participants at FPPE’s Microeconomics and Industrial Organization Workshop for useful comments and suggestions and the seminar audience of IMGTA XV at Urbino for their clarifying suggestions. Additionally Miettinen wants to thank Teemu Lyytikäinen for useful discussions. yDepartment of Economics, University of Helsinki, P.O. Box 54, Unioninkatu 37, FIN-00014 University of Helsinki, Finland. E-mail: [email protected].... zFinnish Post Graduate Program in Economics and Department of Economics , University of Helsinki, P.O. Box 54, Unioninkatu 37. FIN-00014, University of Helsinki, Finland. E-mail: paavo.a.miettinen@helsinki....