Increasing Action Choices and Informational Cascades

Abstract

Many informational cascades models (Welch (1992), Bikhchandani, Hirsh- leifer, and Welch (1992)) are built on the assumption that agents having only two choices. It is also obvious that when there are infinitely many relevant choices, agents can infer the private information from earlier choices and cascades can usually not occur. The contribution of our paper is to show that the importance of cascades does not necessarily decline in the number of choices. Indeed, in the canonical example model here, the expected welfare loss due to cascades is higher for three to fifty choices than it is for two choices. Thus, the potential economic importance of cascades-related information blocking seems quantitatively robust to reasonably larger choice sets.