Sequential decisions with tests

Gill, David and Sgroi, Daniel (2006) Sequential decisions with tests. Games and Economic Behavior, 1-16. (doi:10.1016/j.geb.2006.07.004).


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We consider a principal-agent problem where the principal wishes to be endorsed by a sequence of agents, but cannot truthfully reveal type. In the standard “herding” model, the agents learn from each other's decisions, which can lead to cascades on a given decision when later agents' private information is swamped. We augment the standard model to allow the principal to subject herself to a test designed to provide public information about her type. She must decide how tough a test to attempt from a continuum of test types, which involves trading off the higher probability of passing an easier test against the greater impact from passing a tougher test. We find that the principal will always choose to be tested, and will prefer a tough test to a neutral or easy one.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1016/j.geb.2006.07.004
ISSNs: 0899-8256 (print)
Related URLs:
Keywords: bayesian updating, endorsements, herding, sequential decision-making, tests
Subjects: H Social Sciences > HB Economic Theory
Divisions : University Structure - Pre August 2011 > School of Social Sciences
ePrint ID: 47659
Accepted Date and Publication Date:
14 September 2006Published
Date Deposited: 07 Aug 2007
Last Modified: 31 Mar 2016 12:23

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