Herding with costly information

Research output: Contribution to journalArticle

Abstract

This paper incorporates costly information into a model of observational learning. Individuals would like to avoid the cost of buying information and free-ride on the public history. The paper characterizes when learning is nevertheless complete. Necessary and sufficient conditions for complete learning follow from an elementary principle: a player purchases information only if it can influence her action. With a “coarse” action space, learning is complete if and only if for every cost c>0, a positive measure of types can acquire, at cost less than c, an experiment that can overturn the public history. With a “rich” action space, learning is complete if and only if for every cost c>0, a positive measure of types can acquire any informative signal at cost weakly less than c. The results are applied to financial markets to evaluate when markets are informationally efficient despite information being costly.

Original languageEnglish (US)
Pages (from-to)713-729
Number of pages17
JournalJournal of Economic Theory
Volume175
DOIs
StatePublished - May 2018

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Costs
Costly information
Herding
Purchase
Observational learning
Experiment
Financial markets

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

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Herding with costly information. / Ali, S. Nageeb.

In: Journal of Economic Theory, Vol. 175, 05.2018, p. 713-729.

Research output: Contribution to journalArticle

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