Herding and Informational Cascades
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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