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Sequential decisions with tests

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

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Official URL: http://dx.doi.org/10.1016/j.geb.2006.07.004

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

Dates:

Date	Event
July 2008	Published

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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