Top

Information Systems and e-Business Management

Published in:

01-08-2014 | Original Article

Externalities, incentives and strategic complementarities: understanding herd behavior in IT adoption

Authors: Xiaotong Li, Robert J. Kauffman, Feifei Yu, Ying Zhang

Published in: Information Systems and e-Business Management | Issue 3/2014

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

Herd behavior arises in many instances of information technology (IT) adoption. This study examines the economic and behavioral bases for herd behavior and decision conformity. We investigate the roles of payoff externalities, observational learning and managerial incentives in influencing IT adoption decision-making. Our study underscores the benefits of viewing various drivers of IT adoption herding in a unified framework focusing on equilibrium coordination under strategic complementarities. Motivated by the recent advance in behavioral economics and behavioral game theory, our study relates IT adoption herding to a range of individual-level problems, including managerial incentives, managerial behavioral biases and limited rationality. We develop a coordination game of IT adoption within the unified framework. Our analysis of the game demonstrates that, under strategic complementarities, behavioral biases or incentive problems of a small minority of decision-makers may dramatically impact aggregate outcomes.

previous article Performance of online reputation mechanisms under the influence of different types of biases

next article An empirical investigation on organizational innovation and individual creativity

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Technik"

Online-Abonnement

Mit Springer Professional "Technik" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 390 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Maschinenbau + Werkstoffe

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

Network externalities may not necessarily lead to positive payoff externalities. In some situation where firms adopt same technology to compete with each other, the competitive losses due to congestion effects may dominate the gains from positive network feedback. Positive payoff externalities, even in markets without strong competitive pressures, are usually concave in network size.

The application of a linear payoff function, coupled with evenly-distributed idiosyncratic adoption costs, leads to a unique adoption equilibrium. When the cumulative distribution function takes a more general forms, multiple equilibria often emerge for this setting.

Alevy J, Haigh M, List JA (2006) Information cascades: evidence from a field experiment with financial market professionals. J Finance 62(1):151–180CrossRef

Anderson L, Holt C (1997) Information cascades in the laboratory. Am Econ Rev 87(5):847–862

Angeletos GM, Pavan A (2004) Transparency of information and coordination in economies with investment complementarities. Am Econ Rev 94:91–98CrossRef

Au Y, Kauffman RJ (2003) What do you know? rational expectations in IT adoption and investment. J Manag Info Sys 20(2):49–76CrossRef

Au Y, Kauffman RJ (2004) Rational expectations, optimal control and information technology adoption. Info Sys E-Bus Manag 3(1):47–70CrossRef

Banerjee A (1992) A simple model of herd behavior. Q J Econ 107(3):797–818CrossRef

Barua A, Konana P, Whinston AB, Yin F (2004) An empirical investigation of net-enabled business value. MIS Q 28(4):585–620

Basu A, Mazumdar T, Rai S (2003) Indirect network externality effects on product attributes. Mark Sci 22(2):209–222CrossRef

Bernheim B (1994) A theory of conformity. J Pol Econ 102(5):841–877CrossRef

Bikhchandani S, Sharma S (2001) Herd behavior in financial markets. IMF Staff Papers 47(3):279–310

Bikhchandani S, Hirshleifer D, Welch I (1992) A theory of fads, fashion, custom, and cultural change as informational cascades. J Pol Econ 100(5):992–1026CrossRef

Bikhchandani S, Hirshleifer D, Welch I (1996) Informational cascades and rational herding: an annotated bibliography and resource reference. Working paper, Paul Merage School of Business, University of California, Irvine, CA

Bikhchandani S, Hirshleifer D, Welch I (1998) Learning from the behavior of others: conformity, fads, and informational cascades. J Econ Perspect 12(3):151–170CrossRef

Brandenburger A, Polak B (1996) When managers cover their posteriors: making the decisions the market wants to see. RAND J Econ 27(3):523–541CrossRef

Brynjolfsson E, Kemerer CF (1996) Network externalities in microcomputer software: an econometric analysis of the spreadsheet market. Manag Sci 42(12):1627–1647CrossRef

Camerer C, Fehr E (2006) When does ‘economic man’ dominate social behavior? Science 311:47–52CrossRef

Celen B, Kariv S (2004a) Distinguishing informational cascades from herd behavior in the laboratory. Am Econ Rev 94(3):484–497CrossRef

Celen B, Kariv S (2004b) Observational learning under imperfect information. Games Econ Behav 47(1):72–86CrossRef

Cooper R, John A (1988) Coordinating coordination failures in Keynesian models. Q J Econ 103(3):441–463CrossRef

Crawford V (2003) Lying for strategic advantage: rational and boundedly rational misrepresentation of intentions. Am Econ Rev 93(1):133–149CrossRef

Devenow A, Welch I (1996) Rational herding in financial economics. Eur Econ Rev 40(3):603–615CrossRef

Duan W, Gu B, Whinston AB (2009) Informational cascades and software adoption on the Internet: an empirical investigation. MIS Q 33(1):23–48

Economides N (1996) The economics of networks. Intl J Ind Org 16(4):673–699CrossRef

Edlin A, Stiglitz J (1995) Discouraging rivals: managerial rent-seeking and economic inefficiencies. Am Econ Rev 85(5):1301–1312

Fehr E, Tyran J (2005) Individual irrationality and aggregate outcomes. J Econ Perspect 19(4):43–66CrossRef

Gallaugher J, Wang Y (2002) Understanding network effects in software markets: evidence from web server pricing. MIS Q 26(4):303–327CrossRef

Graham J (1999) Herding among investment newsletters: theory and evidence. J Fin 54(1):237–269CrossRef

Graham J, Harvey C, Puri M (2013) Managerial attitudes and corporate actions. J Fin Econ 109(1):103–121CrossRef

Holmström B (1999) Managerial incentive problems: a dynamic perspective. Rev Econ Stud 66(1):169–182CrossRef

Hong H, Kubik J, Solomon A (2000) Security analysts’ career concerns and herding of earnings forecasts. RAND J Econ 31(1):121–144CrossRef

Hung A, Plott C (2001) Information cascades: replication and an extension to majority rule and conformity-rewarding institutions. Am Econ Rev 91(5):1508–1520CrossRef

Katz M, Shapiro C (1994) System competition and network effects. J Econ Perspect 8(2):93–115CrossRef

Kauffman R, Li X (2005) Technology competition and optimal investment timing: a real options perspective. IEEE Trans Eng Manag 52(1):15–29CrossRef

Kauffman R, McAndrews JJ, Wang Y (2000) Opening the black box of network externalities in network adoption. Info Sys Res 11(1):1, 61-82

Kennedy R (2002) Strategy fads and competitive convergence: an empirical test for herd behavior in primetime TV programming. J Ind Econ 50(1):57–84CrossRef

Laffont J, Martimort D (2002) The theory of incentives: the principal-agent model. Princeton University Press, Princeton

Lee J, Lee J, Lee H (2003) Exploration and exploitation in the presence of network externalities. Manag Sci 49(4):553–570CrossRef

Levinthal D, March J (1993) The myopia of learning. Strateg Manag J 14:95–112CrossRef

Li X (2004) Informational cascades in IT adoption. Commun ACM 47(4):93–97CrossRef

Li X (2005) Cheap talk and bogus network externalities in the emerging technology market. Mark Sci 24(4):531–543CrossRef

Li X (2009a) Managerial entrenchment with strategic information technology: a dynamic perspective. J Manag Info Sys 25(4):183–204CrossRef

Li X (2009b) Preemptive learning, competency traps and information technology adoption: a real options analysis. IEEE Trans Eng Manag 56(4):650–662CrossRef

Liebowitz S (2002) Rethinking the network economy: the true forces that drive the digital economy. Amacom Publishing, Saranac Lake

Malmendier U, Tate G (2005) CEO overconfidence and corporate investment. J Fin 60(6):2661–2700CrossRef

Milgrom P, Roberts J (1990) Rationalizability, learning, and equilibrium in games with strategic complementarities. Econometrica 58(6):1255–1277CrossRef

Morris S, Shin HS (2002) The social value of public information. Am Econ Rev 92:1521–1534CrossRef

Ottaviani M, Sorensen P (2000) Herd behavior and investment: comment. Am Econ Rev 90(3):695–704CrossRef

Ottaviani M, Sørensen P (2006) Reputational cheap talk. J Econ 37(1):155–175

Porter ME (2001) Strategy and the internet. Harv Bus Rev 79(3):62–79

Rogers E (1995) Diffusion of innovations, 4th edn. Free Press, New York

Scharfstein D, Stein J (1990) Herd behavior and investment. Am Econ Rev 80(3):465–479

Schiller R (1995) Rhetoric and economic behavior: conversation, information and herd behavior. Am Econ Rev 85(2):181–185

Tingling P, Parent M (2002) Mimetic isomorphism and technology evaluation: does imitation transcend judgment? J Assoc Info Sys 3:113–143

Vives X (2005) Complementarities and games: new developments. J Econ Lit 43(2):437–479CrossRef

Wade M, Hulland J (2004) The resource-based view and information systems research: review, extension, and suggestions for future research. MIS Q 28(1):107–142

Walden E, Browne G (2002) Information cascades in the adoption of new technology. In L Applegate, J DeGross, R Galliers (eds.), Proc 23rd Intl Conf on Info Sys, Barcelona, Spain, 435-443

Weber D, Kauffman RJ (2011) What drives global ICT adoption? analysis and research directions. Electron Commer Res Appl 10(6):683–701CrossRef

Welch I (2000) Herding among security analysts. J Fin Econ 58(3):369–396CrossRef

Zhang J (1997) Strategic delay and the onset of investment cascades. RAND J Econ 28(1):188–205CrossRef

Zwiebel J (1995) Corporate conservatism and relative compensation. J Pol Econ 103(1):1–25CrossRef

Title: Externalities, incentives and strategic complementarities: understanding herd behavior in IT adoption
Authors: Xiaotong Li
Robert J. Kauffman
Feifei Yu
Ying Zhang
Publication date: 01-08-2014
Publisher: Springer Berlin Heidelberg
Published in: Information Systems and e-Business Management / Issue 3/2014
Print ISSN: 1617-9846
Electronic ISSN: 1617-9854
DOI: https://doi.org/10.1007/s10257-013-0231-2

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 3/2014

On the ontological expressiveness of conceptual modeling grammars for service productivity management

An empirical investigation on organizational innovation and individual creativity

On developing indicators with text analytics: exploring concept vectors applied to English and Chinese texts

Optimizing customized services: efficient computation in large Service Value Networks

Performance of online reputation mechanisms under the influence of different types of biases

Technology as an operant resource in service (eco)systems