Social Learning with Coordination Motives

Abstract

The theoretical study of social learning typically assumes that each agent's action affects only her own payoff. In this paper, I present a model in which agents' actions directly affect the payoffs of other agents. On a discrete time line, there is a community containing a random number of agents in each period. Before each agent needs to take an action, the community receives a private signal about the underlying state of the world and may observe some past actions in previous communities. An agent's payoff is higher if her action matches the state or if more agents take the same action as hers. I analyze two observation structures: exogenous observation and costly strategic observation. In both cases, coordination motives enhance social learning in the sense that agents take the correct action with significantly higher probability when the community size is greater than a threshold. In particular, this probability reaches one (asymptotic learning) with unbounded private beliefs and can be arbitrarily close to one with bounded private beliefs. I then discuss the issue of multiple equilibria and use risk dominance as a criterion for equilibrium selection. I find that in the selected equilibria, the community size has no effect on learning under exogenous observation, facilitates learning under endogenous observation and unbounded private beliefs, and either helps or hinders learning under endogenous observation and bounded private beliefs.