Can herding improve investment decisions?

Existing models show that herding in decisions can cause significant information loss, inferior information aggregation and impaired decision making. However, we show that in a multi-stage decision setting with endogenous information production, herding on the initial decision can actually result in superior aggregate information and improved decisions. This is because the possibility of herding by a follower incentivizes the leader to increase its ex-ante information production to an extent that it can dominate the information loss from herding. Examples include decisions to enter new markets, fund R&D, and provide early-stage venture capital. Khanna is at Eli Broad College of Business, Michigan State University, 320 Eppley Center, East Lansing, MI 48824, email: [email protected]. Mathews is at Fuqua School of Business, Duke University, 100 Fuqua Dr., Durham, NC 27708, email: [email protected]. We thank David Martimort (the editor), two anonymous referees, Michael Brandt, Simon Gervais, Ron Kaniel, Manju Puri, Adriano Rampini, David Robinson, Lukas Schmid, Berk Sensoy, Matt Spiegel, S. Viswanathan, and seminar participants at Duke University for helpful discussions and comments. All errors