Communication and Learning: The Bilateral Information Transmission in the Cobweb Model

Communication is a natural activity to gain information and exchange ideas for making proper economic decisions. The mechanism of social interaction remains inadequately understood. Previous studies have investigated the consequences of communication under a one-way information transmission mechanism from more-informed leaders to less-informed followers. This mechanism leads to the “boomerang effect”—a reduction in leaders’ forecasting efficiency due to the information transmission. However, communication should be interactive. This paper devises a two-stage interactive cobweb model with a generalized information diffusion process called the bi-directional information diffusion (BID) process, which allows both information transmission and feedback mechanisms. Numerical analysis and simulations show that the model has multiple equilibria and can be dynamically stable under certain conditions. More importantly, the BID process improves forecast efficiency for all individuals, and the boomerang effect disappears if leaders correctly observe followers’ forecasts to revise their expectations.