On the Inefficiency of Social Learning

TL;DR

This paper investigates whether a social planner can enhance the efficiency of sequential social learning through information design and monetary transfers, concluding that finite budgets cannot fully correct inefficiencies.

Contribution

It demonstrates that, despite flexible interventions, finite-budget strategies cannot fully restore efficient learning in environments with inherent inefficiencies.

Findings

Finite budgets cannot achieve efficient learning when it is initially inefficient.

Social information and transfers cannot compensate for inefficiencies within a limited budget.

Efficient learning requires infinite or unbounded interventions, which are impractical.

Abstract

We study whether a social planner can improve the efficiency of learning, measured by the expected total welfare loss, in a sequential decision-making environment. Agents arrive in order and each makes a binary action based on their private signal and the social information they observe. The planner can intervene by jointly designing the social information disclosed to agents and offering monetary transfers contingent on agents' actions. We show that, despite such flexibility, efficient learning cannot be restored with a finite budget: whenever learning is inefficient without intervention, no combination of information disclosure and transfers can achieve efficient learning while keeping total expected transfers finite.