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    Social Learning in Continuous Time: When are Informational Cascades More Likely to be Inefficient : CEPR Discussion Paper No. 5120


    Pastine, Ivan and Pastine, Tuvana (2006) Social Learning in Continuous Time: When are Informational Cascades More Likely to be Inefficient : CEPR Discussion Paper No. 5120. Working Paper. Centre for Economic Policy Research, London.

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    Abstract

    In an observational learning environment rational agents maymimic the actions of the predecessors even when their own signal suggests the opposite. In case early movers’ signals happen to be incorrect societymay settle on a common inefficient action, resulting in an inefficient informational cascade. This paper models observational learning in continuous time with endogenous timing of moves. This permits the analysis of comparative statics results. The effect of an increase in signal quality on the likelihood of an inefficient cascade is shown to be nonmonotonic. If agents do not have strong priors, an increase in signal quality may lead to a higher probability of inefficient herding. The analysis also suggests that markets with quick response to investment decisions, such as financial markets, may be more prone to inefficient collapses.

    Item Type: Monograph (Working Paper)
    Additional Information: We would like to thank Rabah Amir and Christophe Chamley for their assistance. This paper has been presented at theWorkshop on Informational Herding Behavior 2005 arranged by the Dynamic Economic TheoryNetwork based at theDepartment of Economics at theUniversity of Copenhagen. We would like to thank the participants for their helpful comments. Responsibility for errors remains our own.
    Keywords: Comparative Statics; Herding; Herd Manipulation;
    Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
    Item ID: 5043
    Depositing User: Tuvana Pastine
    Date Deposited: 23 Jun 2014 15:52
    Publisher: Centre for Economic Policy Research
    URI:

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