Too Costly To Follow Blindly: Endogenous Learning and Herding

Authors: Srijita Ghosh

ABSTRACT:

I analyze the impact of endogenizing social and private learning in a herding problem. Private learning is modeled à la rational inattention literature. I find a non-monotone relationship between social and private learning. They are substitutes when private learning is sufficiently cheap and become complement for higher private learning costs and eventually becomes uninformative. This happens because an increase in private learning costs makes social learning less informative. As an implication, only the reduction of the cost of private learning unambiguously increases welfare contrary to the herding result, where restricting social learning initially is optimal.