Slow Social Learning: Innovation Adoption under Network Externalities

Abstract

We analyze the consequences of payoff externalities in social learning. The leading example is innovation adoption under network effects. When choosing whether to adopt a new innovation, an individual agent faces uncertainty about the quality of the innovation and about its popularity in the future. When the experiences of early adopters work as signals about the quality, a combination of informational and payoff externalities arises. We show that this combination has a surprising effect when the payoff externality is positive: a higher potential for social learning, e.g. due to high media coverage, slows down learning in equilibrium.