Social Learning through Endogenous Information Acquisition: An Experiment

This paper provides a test of a theory of social learning through endogenous information acquisition. A group of subjects face a decision problem under uncertainty. Subjects are endowed with private information about the fundamentals of the problem and make decisions sequentially. The key feature of the experiment is that subjects can observe the decisions of predecessors by forming links at a cost. The model predicts that decision making is enhanced by the presence of a small, but positive, link cost, and our experimental results support this prediction. More generally, due to deviations from rationality such as a tendency to conform and herding in link formation, the prediction success of subjects often falls when they form links. Despite such deviations, we show that subjects respond to changes in the information structure and the cost of link formation in the expected manner and that some learning takes place.