UC Irvine

This paper studies the interaction between coordination and social learning in a dynamic regime change game. Social learning provides public information, to which players overreact due to the coordination motive. Coordination affects the aggregation of private signals through players' optimal choices. Such endogenous provision of public information results in informational cascades, and thus inefficient herds, with positive probability, even if private signals have an unbounded likelihood ratio property. An extension shows that if players can individually learn, there exists an equilibrium in which inefficient herding disappears, and thus coordination is almost surely successful.