Information Externalities and Learning with Sequential Interactions

Abstract

We develop a model of technological choice with social learning in which the timing of adoption of new technologies is endogenous. Social learning occurs through information externalities, because the decision of an early adopter reveals his private information to the other agent. In our model, not only the decision to adopt a new technology is informative for the agent who is in a waiting position, but also the decision to wait. We show that more informed agents act as “leaders” by adopting a new technology earlier than less informed agents. The latter act as “followers” by rationally imitating the adoption choices they observed previously. Although pure imitation is usually a source of inefficiency, in our context, imitation of early technological choices is socially efficient. This happens in our context because of complete revelation of useful information despite imitation. As a consequence there is a very low probability of making errors. We compare our context of social learning to other contexts, in which the revelation of useful information is incomplete and the probability of errors is larger. Although our context is informationally more efficient, the social surplus is not necessarily higher than in other contexts. Indeed, the process of information revelation can be highly time consuming, leading to large costs of delay, which may offset the information advantage.