87 Pages Posted: 3 Jun 2015 Last revised: 15 Nov 2015
Date Written: October 2015
We study information acquisition from peers when agents' actions balance adaptation and coordination motives. Agents acquire information personally and may obtain additional information by connecting to other agents. Although equally informative regarding adaptation, the source's relative position in the information structure is relevant to form expectations about actions of other players. In our setting, information sources are not perfectly substitutable, and the information of an "opinion maker" --- an agent whose information is more public --- is more informative of how others act. We show that, when players choose their connections, (i) it is always preferable to connect to opinion makers, and (ii) opinion makers have less incentives to form links. These two results characterize the endogenous shape of the network: Any strict equilibrium of the network formation game generates a hierarchical information structure. Furthermore, if the marginal cost of acquiring information is increasing, the information structure is "core-periphery". We take advantage of the simplicity of the equilibrium information structure to provide two applications. First, we use data on earnings-per-share forecasts to provide an example of how much of the aggregate volatility of forecast can the information structure account for. Second, we focus on the origins of leadership: how individual characteristics influence the role of the agent in the information structure.
Keywords: Network Formation, Information Acquisition, Coordination
JEL Classification: D83, D85
Suggested Citation: Suggested Citation