In this question we consider a variation on the model of information cascades from Chapter 16….

In this question we consider a variation on the model of information cascades from Chapter 16. Suppose that there is a new technology that individuals sequentially decide to adopt or reject. Let’s suppose that anyone who adopts the new technology receives either a positive or a negative payoff from using the new technology. Unlike the model used in Chapter 16, these payoffs are random and have the property that the average payoff is positive if the technology is good, and negative if the technology is bad. Anyone who decides to reject the new technology always receives a payoff of exactly zero.

As in the model used in Chapter 16, each person receives a private signal about the technology and observes the actions of all who chose previously. However, unlike the model used in Chapter 16, each person is also told the payoffs received by everyone who moved previously. (One interpretation of this is that a government agency collects information about individuals’ experiences and distributes it for free as a public service.)

(a) Suppose that the new technology is actually Bad. How does this new information about payoffs (the payoffs received by each of those who moved previously) affect the potential for an information cascade of choices to adopt the new technology to form and persist? (You do not need to write a proof. A brief argument is sufficient.)

(b) Suppose that the new technology is actually Good. Can an information cascade of rejections of the new technology occur? Explain briefly.

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