The Enthusiastic Few, Peer Effects and Entrapping Bandwagons

Abstract

We study an economic setting where, due to payoff externalities such as peer effects or network externalities, the enthusiasm of the few entraps others to join an activity or club. Our experimental results largely support the model and its theoretical prediction of entrapment. Subjects choose to join 81% of the time. Overall 89% of the observations are consistent with quantal response equilibrium play. Entrapment indeed occurs; aggregate welfare is lower in most treatments than if no one were to join and, if welfare is measured purely in terms of individual payoffs, also lower than if everyone were to join.

Keywords: Peer effects, network externalities, bandwagons, entrapment, welfare

JEL Classification: C91, D62, H89, I12, K42