1994 Reports

Herd Behavior, the "Penguin Effect", and the Suppression of Informational Diffusion: An Analysis of Informational Externalities and Payoff Interdependency

Choi, Jay Pil

This paper analyzes a technology adoption process in which the effect of informational spillover interacts with network externalities. It is shown that the interplay of informational externalities and payoff interdependency induces risk averse and clustering behavior in the technology adoption process. our analysis differs from the herd behavior literature in focusing on how the herd behavior of subsequent users influences the initial adoption decision. The mechanism through which herd behavior is generated is also quite different. herd behavior in this paper stems from each agent's desire to inhibit the revelation of new information which can be used in a way detrimental to her, rather than from each others agent's effort to free -ride on information contained in the decisions made by predecessors. Finally, the model suggests a new perspective on standard-setting committees. Their role is to limit deliberately the effects of information flows, rather than to serve as a forum for exchange of information and negotiation.