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.
|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
|Date Deposited:||07 Aug 2007|
|Last Modified:||02 Mar 2012 11:30|
|RDF:||RDF+N-Triples, RDF+N3, RDF+XML, Browse.|
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