Imitation in location choice

formation concerning revenues and costs. In these low-information environments with
limited retail activity, stigmatizing perceptions may result in lock-in, because lack of
new entrants into these neighborhoods cuts off the production of new information
about the profitability of current business activity.

One of the models results is to reveal conditions under which imitation in lo-
cation choice is consistent with individual profit maximization. In so doing, the
model provides a benchmark for addressing the normative question of how imitation
affects aggregate efficiency. Incentives that rationalize imitation from the point of
view of individual firms can, however, lead to socially inefficient neglect of profitable
locations—for example, when firms do not consider moving into a no-retail neighbor-
hood simply because no other firms are observed there, and not because expected
profits were estimated and deemed too low.

For parameterizations with low costs of private information, the models first movers
acquire large quantities of private information, and imitation by second movers is con-
sistent with social efficiency (i.e., maximization of aggregate profit by a centrally coor-
dinated program designed to efficiently exploit the positive informational externality
flowing from first to second movers). In this case, the first mover is well informed
about where to find good locations and, consequently, centralized and decentralized
regimes differ very little. As information becomes more expensive, however, imita-
tion becomes increasingly inconsistent with aggregate efficiency, because first movers
acquire small quantities of private information and the aggregate benefits of pooling
additional private signals grow larger. But because firms and centralized planners
both demand very little information when information is very expensive, the gap in
aggregate profits between decentralized and centralized regimes shrinks and ineffi-
ciency tends toward zero at the other extreme of the cost-of-information spectrum.
Thus, efficiency losses are largest in the intermediate range of the cost of private

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