Herding with Costs to Observation

Abstract

When agents are presented with information from others, they might ignore their own information and follow the “wisdom of the crowds”. As first noted by Bikhchandani et al. (1992) and Banerjee (1992), this can harm overall learning in a society. In this paper, I consider the strategic decisions of agents in gathering this public information when there is a constant marginal cost to observing other agents. Costs have an ambiguous effect on the likelihood that society herds on the correct action. In some cases, there is an intermediate range of costs that are high enough that some agents will choose not to imitate others but low enough that later agents will then aggregate this additional information.