Step-by-Step Explanation of Hendricks and Kovenock (1989)'s Model of Social Learning

16 Pages Posted: 22 Apr 2009 Last revised: 8 Nov 2012

See all articles by Marc Santugini

Marc Santugini

University of Virginia - Department of Economics

Date Written: November 7, 2012

Abstract

We explain the Hendricks and Kovenock (1989)'s framework by studying the behavior of two strategic firms under an informational externality. The informational externality arises when each firm of a social network is endowed with private information regarding the profitability of the investment. In such situations, the past decisions of the firms are informative and, thus, are used as partially revealing signals of private information. Asymmetric information and the observability of actions render the firm's problem dynamic and strategic because the investment decision of one firm affects the other firms' future payoffs through the learning process. We describe the model and we show that there exists a unique symmetric Bayesian Nash equilibrium. The informational externality increases the likelihood for a firm to refrain from investing immediately in order to make a more informed decision in the future.

Suggested Citation

Santugini, Marc, Step-by-Step Explanation of Hendricks and Kovenock (1989)'s Model of Social Learning (November 7, 2012). Available at SSRN: https://ssrn.com/abstract=1393288 or http://dx.doi.org/10.2139/ssrn.1393288

Marc Santugini (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

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