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  4. May 2017
  5. Aggregate Uncertainty Can Lead to Incorrect Herds

American Economic Journal:
Microeconomics

ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)

Aggregate Uncertainty Can Lead to Incorrect Herds

  • Ignacio Monzón
American Economic Journal: Microeconomics
vol. 9, no. 2, May 2017
(pp. 295–314)
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Abstract

A continuum of homogeneous rational agents choose between two competing technologies. Agents observe a private signal and sample others' previous choices. Signals have an aggregate component of uncertainty, so aggregate behavior does not necessarily reflect the true state of nature. Nonetheless, agents still find others' choices informative, and base their decisions partly on others' behavior. Consequently, bad choices can be perpetuated: aggregate uncertainty makes agents herd on the inferior technology with positive probability. I derive the optimal decision rule when agents sample exactly two individuals. I also present examples with herds on the inferior technology for arbitrarily large sample sizes.

Citation

Monzón, Ignacio. 2017. "Aggregate Uncertainty Can Lead to Incorrect Herds." American Economic Journal: Microeconomics, 9 (2): 295–314. DOI: 10.1257/mic.20140212

Additional Materials

JEL Classification

  • C72 Noncooperative Games
  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
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