RATIONAL HERDING IN FINANCIAL ECONOMICS

This paper briefly describes recent papers on the economics of rationa l herding in financial markets. Some models can predict perfect herdin g, in which rational agents all act alike without any countervailing f orce, Such herding typically arises either from direct payoff external ities (negative externalities in bank runs; positive externalities in the generation of trading liquidity or in information acquisition), pr incipal-agent problems (based on managerial desire to protect or signa l reputation), or informational learning (cascades). The paper also pr ovides a few pointers to related literature and suggests issues to be addressed in future research.