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Sequential decisions with tests

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Sgroi, Daniel and Gill, David, 1975-. (2008) Sequential decisions with tests. Games and economic behavior, Vol.36 (No.2). pp. 663-678. ISSN 0899-8256

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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.

Item Type: Journal Article
Subjects: H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Decision making, Bayesian statistical decision theory
Journal or Publication Title: Games and economic behavior
Publisher: Elsevier
ISSN: 0899-8256
Official Date: July 2008
Volume: Vol.36
Number: No.2
Page Range: pp. 663-678
Identification Number: 10.1016/j.geb.2006.07.004
Status: Peer Reviewed
Access rights to Published version: Open Access
Funder: Economic and Social Research Council (Great Britain) (ESRC), AEA Technology (Firm)
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URI: http://wrap.warwick.ac.uk/id/eprint/44

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