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Sequential decisions with tests

  • Gill, David
  • Sgroi, Daniel

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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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 63 (2008)
Issue (Month): 2 (July)
Pages: 663-678

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Handle: RePEc:eee:gamebe:v:63:y:2008:i:2:p:663-678
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  2. Emmanuel Farhi & Josh Lerner & Jean Tirole, 2005. "Certifying New Technologies," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 734-744, 04/05.
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  13. Taylor, Curtis R, 1999. "Time-on-the-Market as a Sign of Quality," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 555-78, July.
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