Herding through booms and busts

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• dc.contributor.author Schaal, Edouard
• dc.contributor.author Taschereau-Dumouchel, Mathieu
• dc.date.accessioned 2023-07-28T08:41:11Z
• dc.date.available 2023-07-28T08:41:11Z
• dc.date.issued 2023
• dc.description Includes supplementary materials for the online appendix.
• dc.description.abstract This paper explores whether rational herding can generate endogenous aggregate fluctuations. We embed a tractable model of rational herding into a business cycle framework. In the model, technological innovations arrive with unknown qualities, and agents have dispersed information about how productive the technology really is. Rational investors decide whether to invest based on their private information and the investment behavior of others. Herd-driven boom-bust cycles arise endogenously in this environment when the technology is unproductive but investors’ initial information is overly optimistic. Their overoptimism leads to high investment rates, which investors mistakenly attribute to good fundamentals, leading to a self-reinforcing pattern of higher optimism and higher investment until the economy reaches a peak, followed by a crash when agents ultimately realize their mistake. We calibrate the model to the U.S. economy and show that it can broadly explain boom-and-bust cycles like the dot-com bubble of the 1990s.
• dc.description.sponsorship Edouard Schaal acknowledges financial support from the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563 and CEX2019-000915-S) and through the program Proyecto I+D Excelencia 2017 (ECO2017-87827-P-AEI/FEDER, UE), and support from the Generalitat de Catalunya, through CERCA and SGR Programme (2017-SGR-1393).
• dc.format.mimetype application/pdf
• dc.identifier.citation Schaal E, Taschereau-Dumouchel M. Herding through booms and busts. Journal of Economic Theory. 2023 Jun;210:105669. DOI: 10.1016/j.jet.2023.105669
• dc.identifier.doi http://dx.doi.org/10.1016/j.jet.2023.105669
• dc.identifier.issn 0022-0531
• dc.identifier.uri http://hdl.handle.net/10230/57706
• dc.language.iso eng
• dc.publisher Elsevier
• dc.relation.ispartof Journal of Economic Theory. 2023 Jun;210:105669
• dc.relation.projectID info:eu-repo/grantAgreement/ES/1PE/SEV-2015-0563
• dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/ECO2017-87827-P
• dc.rights © 2023 The Author(s). Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/4.0/
• dc.subject.keyword Endogenous business cycles
• dc.subject.keyword Incomplete information
• dc.subject.keyword Herding
• dc.title Herding through booms and busts
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/publishedVersion