Sequential decisions with tests
Sequential decisions with tests
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.
bayesian updating, endorsements, herding, sequential decision-making, tests
1-16
Gill, David
2319117f-b14e-48c6-8a33-34f5c9d4e2ea
Sgroi, Daniel
56178598-890e-4fe1-8b83-e518f03345c9
14 September 2006
Gill, David
2319117f-b14e-48c6-8a33-34f5c9d4e2ea
Sgroi, Daniel
56178598-890e-4fe1-8b83-e518f03345c9
Abstract
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.
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Published date: 14 September 2006
Keywords:
bayesian updating, endorsements, herding, sequential decision-making, tests
Identifiers
Local EPrints ID: 47659
URI: http://eprints.soton.ac.uk/id/eprint/47659
ISSN: 0899-8256
PURE UUID: 2da2ff92-7ad6-49ad-8ac3-d10e40db80a9
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Date deposited: 07 Aug 2007
Last modified: 15 Mar 2024 09:35
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Author:
David Gill
Author:
Daniel Sgroi
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