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A Simple Model of Herd Behavior

Abhijit Banerjee

The Quarterly Journal of Economics · 1992 · 6,657 citations

doi.org/10.2307/2118364

Abstract

We analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision. This is rational for her because these other decision makers may have some information that is important for her. We then show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. We then show that the resulting equilibrium is inefficient.

Cite this paper

Banerjee, A. (1992). A simple model of herd behavior. The Quarterly Journal of Economics, 107(3), 797–817. https://doi.org/10.2307/2118364

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