Herding and Informational Cascades

Abstract

Abstract Classifies different herding models. Rational herding in sequential decision‐making is either due to payoff externalities or information externalities. In herding models with reputational effects in a principal‐agent setting both types of externalities are present. Herding due to information externalities may arise in settings where the predecessor's action is a strong enough signal such that the agent disregards his own signal. Informational cascades might emerge if the predecessor's action is only a noisy signal of his information. We distinguish between exogenous sequencing where the order of moves is pre‐specified, and endogenous sequencing where the decision makers decide when to move.

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