Economics Letters 78 (2003) 401–407 www.elsevier.com / locate / econbase Prevention of herding by experts * Vladislav Kargin Cornerstone Research, 599 Lexington Avenue, New York, NY 10022, USA Received 27 August 2001; received in revised form 23 May 2002; accepted 5 September 2002 Abstract Experts tend to herd if they can communicate among themselves. I show that every expert can be induced to do independent research and report truthful results if and only if payments to the expert depend on other experts’ reports. If the experts are risk-averse then the prevention of herding is costly.  2002 Elsevier Science B.V. All rights reserved. Keywords: Herding; Information cascades; Communication; Multiple agents JEL classification: D82 1. Introduction Consider the following situation. For predicting market returns, a financial company uses the services of several experts who can communicate and share their results. The first problem is that an expert may shirk responsibilities if the client does not offer sufficient incentives. The second problem arises when these incentives are offered because in these cases the expert may choose to bias his own results towards results of the other experts. The difficulty of contract design in this situation is that inducing research may simultaneously create stimuli for misrepresenting the results obtained. For example, reports of financial analysts who track a company for a corporate client are often 1 biased by prior reports. It is also well known that the analysts are paid on the basis of their relative performance. Institutional Investor publishes a ranking of the analysts and they get paid according to their position in the ranking. Do relative performance payments cause herding, or do they help reduce herding? And, do analysts enjoy any rent from the possibility of herding? This paper derives two results about contracting in this situation. (1) It proves that the client can *Tel.: 11-212-605-5018; fax: 11-212-759-3045. E-mail address: slavakargin@yahoo.com (V. Kargin). 1 See Trueman (1994), Graham (1999), and Welch (2000). 0165-1765 / 02 / $ – see front matter  2002 Elsevier Science B.V. All rights reserved. PII: S0165-1765(02)00252-5