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Publication Date:
July 2007
ISSN:
1935-1704
DOI:
10.2202/1935-1704.1320

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Ed. by Cervellati, Matteo / Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Schipper, Burkhard

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Herding with Costly Observation

Klaus K Kultti1 / Paavo A Miettinen2

1Department of Economics, University of Helsinki, klaus.kultti@helsinki.fi

2Bank of Finland and Department of Economics, University of Helsinki, paavo.miettinen@bof.fi

Citation Information: The B.E. Journal of Theoretical Economics. Volume 7, Issue 1, Pages –, ISSN (Online) 1935-1704, DOI: 10.2202/1935-1704.1320, July 2007

Publication History:
Published Online:
2007-07-31

We characterize optimal strategies in a simple herding model where observations have a small cost. We assume that there are two states and two possible signals that each agent may get. The prior distribution is biased towards adopting behavior. That is, ex-ante, adopting gives a higher expected utility than not adopting. Contrary to Kultti & Miettinen (2005) herding does not arise deterministically in this model when the cost of observation is small.

Keywords: herding; information acquisition

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