Endogenous order and information aggregation

Abstract

Privately informed experts with heterogeneous expertise decide when to give advice and what advice to give. Each expert’s utility depends upon that expert’s own message as well as those of the other experts. Under different forms of payoff externalities, we find varying results for the optimal order in which messages are sent and the existence of herd behavior. Under negative payoff externalities, all experts send a message together without any delay and a herd never arises. This leads to truthful revealing of all private information. Without forcing any order of speech, we obtain a result similar to the ‘anti-seniority rule’. This, however, goes in the opposite direction when positive payoff externalities are induced. An incentive structure with positive payoff externalities gives rise to a herd led by the most precise expert with a delay in the disclosure of information. Next, we test for the nature of payoff externalities in the remuneration of forecasters listed with I/B/E/S. We find that the underlying payoff externalities are negative, i.e. the benefit from making dissimilar forecasts is higher than that from making similar ones.