Increasing Action Choices and Informational Cascades

Abstract

This paper investigates the role of more action choices in a simple informational cascades (IC) model (Welch (1992), Bikhchandani, Hirshleifer, and Welch (1992)). In the canonical binary signal model with a diffuse prior on the underlying best choice, cascades disappear when agents have infinitely many choices. Later agents can always infer private information from earlier agents’ actions. The expected welfare loss with a large number of agents due to informational cascades — i.e., due to information blockage under action observability instead of signal observability — is zero. However, with a modest number of more choices, the relative importance of cascades at first increases. It declines only eventually and slowly with a very large number of choices.