Aggregate Uncertainty Can Lead to Incorrect Herds

Abstract

A continuum of homogeneous rational agents choose between two competing technologies. Agents observe a private signal and sample others' previous choices. Signals have an aggregate component of uncertainty, so aggregate behavior does not necessarily reflect the true state of nature. Nonetheless, agents still find others' choices informative, and base their decisions partly on others' behavior. Consequently, bad choices can be perpetuated: aggregate uncertainty makes agents herd on the inferior technology with positive probability. I derive the optimal decision rule when agents sample exactly two individuals. I also present examples with herds on the inferior technology for arbitrarily large sample sizes. (JEL C72, D83)

Information exchange links, knowledge exposure, and adoption of agricultural technologies in northern Uganda

“…Together, these findings support evidence that social learning increases diffusion of agricultural knowledge (Bandiera and Rasul, 2006;Conley and Udry, 2010;Ben Yishay and Mobarak, 2014;Kondylis et al, 2016;2017).…”

“…This study seeks to systematically assess the determinants of information exchange links between trained IPs and their neighbors and the subsequent effect on awareness, knowledge, and adoption of agricultural technologies. There has been much interest recently to understand the effect of IPs on adoption behavior of their neighbors (e.g., Kondylis et al, 2016;2017). Most of this previous work has benefited from insights about selection of IPs (Banerjee et al, 2014;Kim et al, 2015;Beaman et al, 2016, Chami et al, 2017 and incentives for knowledge diffusion (BenYishay and Mobarak, 2014).…”

Incentives, social learning and economic development : Experimental and quasi-experimental evidence from Uganda

“…Such low quality seeds substantially reduced the yields of crops and discouraged farmers' investment behaviour. On the one hand, in the presence of aggregate uncertainty about the quality of seeds, farmers may not only herd on inferior "traditional" crop varieties ( Monzón, 2017) but may also be reluctant to listen to advice related to cultivation of improved new seeds. On the other hand,…”

“…When individuals are exposed to diverse private information about the situation they face, they often base their decisions on those of others (Monzón, 2017). Social learningprocessing of information gained by observing others-has received much attention, both in the theoretical (see Acemoglu et al, 2011 for a review) 1 and empirical (Bandiera and Rasul, 2006;Conley and Udry, 2010) 2 literature as a conduit for technology diffusion.…”

“…Bold et al (2017) showed a large presence of adulterated agro-inputs in Uganda which depressed yields and discouraged investment by farmers. The aggregate uncertainty introduced by fake seeds may lead to 'incorrect herds' when the inferior technology is chosen in the long run with positive probability (Monzón, 2017). Designing optimal incentives for prosocial behaviour in agricultural settings will, therefore, require a better understanding of the context in which farmers operate and addressing market imperfections related to poor quality of inputs.…”