Herding with and without payoff externalities — an internet experiment

Mathias Drehmann, Jörg Oechssler,  and Andreas Roider " Herding with and without payoff externalities — an internet experiment."  International Journal of Industrial Organization, Volume 25, Issue 2, April 2007, Pages 391-415. DOI.

Abstract

Most real world situations that are susceptible to herding are also characterized by direct payoff externalities. Yet, the bulk of the theoretical and experimental literature on herding has focused on pure informational externalities. In this paper, we experimentally investigate the effects of several different forms of payoff externalities (e.g., network effects, first-mover advantage, etc.) in a standard information-based herding model. Our results are based on an internet experiment with more than 6000 subjects, of which more than 2400 participated in the treatments reported here, including a subsample of 267 consultants from an international consulting firm. We also replicate and review earlier cascade experiments. Finally, we study reputation effects (i.e., the influence of success models) in the context of herding.

Keywords: Information cascades; Herding; Network effects; Reputation; Experiment; Internet

JEL classification codes: C92; D8

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