Journal of Economic Literature (JEL) Code(s)
D82, D83, I11, I18
There are many economic environments in which an object is oﬀered sequentially to prospective buyers. It is often observed that once the object for sale is turned down by one or more agents, those that follow do the same. One explanation that has been proposed for this phenomenon is that agents making choices further down the line rationally ignore their own assessment of the object’s quality and herd behind their predecessors. Our research adds a new dimension to the canonical herding model by allowing agents to di er in their ability to assess the quality of the oﬀered object. We develop novel tests of herding based on this ability heterogeneity and also examine its eﬀiciency consequences, applied to organ transplantation in the U.K. We nd that herding is common but that the information lost due to herding does not substantially increase false discards of good organs or false acceptances of bad organs. Our counter-factual analysis indicates that this is due (in part) to the high degree of heterogeneity in ability across transplant centers. In other settings, such as the U.S., where organ transplantation is organized very diﬀerently and the ability distribution will not be the same, the ineﬀiciencies due to herding might well be substantial.
De Mel, Stephanie; Munshi, Kaivan; Reiche, Soenje; and Sabourian, Hamid, "Herding with Heterogeneous Ability: An Application to Organ Transplantation" (2021). Cowles Foundation Discussion Papers. 2656.