Strategic Delay and Rational Imitation in the Laboratory ∗ Anthony Ziegelmeyer, Kene Boun My, Jean-Christophe Vergnaud, and Marc Willinger † Preliminary draft. Comments are welcome. Abstract This paper investigates market failures due to strategic delays. We test experimentally a discrete model of dynamic investment, where two privately informed agents have an option to invest at the time of their choice in the presence of waiting costs. The equilibrium outcome of our experimental game is characterized by efficient imitation but complete revelation of information is time consuming. In accordance with the equilibrium solution, subjects better informed take investment decision before subjects who are less informed and subjects’ decisions exhibit rational imitation. Still, subjects do not play exactly in accordance with the equilibrium sequence and we interpret their deviations from equilibrium play as an attempt to internalize the information externalities. Keywords: Information Externalities, Social Learning, Strategic Delay, Experiments JEL Classification: C91, D82 1 Introduction In economic situations where decisions are based on private signals and have a common value com- ponent, individuals may rely on whatever information they have obtained via observation of others’ actions. This process of observational learning can lead individuals to the failure to exploit their own information in a socially optimal way. Indeed, early models dealing with observational learning, also called social learning, and pure information externalities with exogenous timing of decisions have shown that, because they rationally process information, selfish individuals ignore their own information, after observing a finite number of other decisions, and imitate the “herd” (see Baner- jee, 1992, Bikhchandani, Hirshleifer, and Welch, 1992, and Welch, 1992). Herd behavior has been proposed as an explanation of a variety of economic phenomena such as investments breakdown in crisis and failures of optimal technological shifts, as well as of widely observed social phenomena such as manias, social customs, and panics. Once the timing of decisions is endogenized, individuals might strategically delay their decisions in order to benefit from the positive information externali- ties generated by their predecessors’ actions. Under the reasonable assumption that delay is costly, we encounter a new form of market failure namely that all the information initially possessed by individuals will be revealed asymptotically, but so slowly that economic welfare is much less than the ∗ Not everyone who commented on this work can be mentioned here, but the authors would particularly like to thank Fr´ ed´ eric Koessler and Bradley Ruffle. Of course, only the authors can be held responsible for the statements made herein. This paper is based on Chapter 9 of the first author dissertation. † Ziegelmeyer (corresponding author): Max Planck Institute of Economics, Strategic Interaction Group, Jena, Ger- many (email: ziegelmeyer@econ.mpg.de). Boun My: BETA, Universit´ e Louis Pasteur, Strasbourg, France (email: bounmy@cournot.u-strasbg.fr). Vergnaud: EUREQua, Universit´ e Paris I, Paris, France (email: vergnaud@univ- paris1.fr). Willinger: LAMETA, Universit´ e Montpellier 1, Montpellier, France (email: willinger@lameta.univ- montp1.fr). 1