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Fads and imperfect information

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  • Nicholas Janetos

    (Penn Wharton Budget Model)

Abstract

A fad is something that is popular for a time, then unpopular. For example, in the 1960s tailï¬ ns on cars were popular, in the 1970s they were not. I study a model in which fads are driven through the channel of imperfect information. Some players have better information about past actions of other players, and all players have preferences for choosing the same actions as well-informed players. In equilibrium, better informed (high-type) players initially pool on a single action choice. Over time, the low-type players learn which action the high-type players are pooling on, and start to mimic them. Once a tipping point is reached, the high-type players switch to a dfferent action, and the process repeats. I explicitly compute equilibria for a speciï¬ c parameterization of the model. Low-type players display instrumental preferences for conformity, choosing actions which appear more popular, while high-type players sometimes coordinate on actions which appear unpopular. Improving the quality of information to low-type players does not improve their payoffs, but increases the rate at which high-type players switch between actions.

Suggested Citation

  • Nicholas Janetos, 2017. "Fads and imperfect information," PIER Working Paper Archive 17-009, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 May 2017.
    • Handle: RePEc:pen:papers:17-009
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Fads; social norms;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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