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Sequential Decisions with Tests

Author

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  • David Gill
  • Daniel Sgroi

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.

Suggested Citation

  • David Gill & Daniel Sgroi, 2005. "Sequential Decisions with Tests," Economics Series Working Papers 242, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:242
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper242.pdf
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    References listed on IDEAS

    as
    1. Lones Smith & Peter Sorensen, 2000. "Pathological Outcomes of Observational Learning," Econometrica, Econometric Society, vol. 68(2), pages 371-398, March.
    2. Gill, D. & Sgroi, D., 2003. "Product Launches with Biased Reviewers: The Importance of Not Being Earnest," Cambridge Working Papers in Economics 0334, Faculty of Economics, University of Cambridge.
    3. Gill, David & Sgroi, Daniel, 2012. "The optimal choice of pre-launch reviewer," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1247-1260.
    4. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, December.
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    13. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    14. Curtis R. Taylor, 1999. "Time-on-the-Market as a Sign of Quality," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 555-578.
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    16. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, pages 716-727.
    17. David Gill & Daniel Sgroi, 2004. "The Superiority of Biased Reviewers in a Model of Simultaneous Sales," Economics Series Working Papers 206, University of Oxford, Department of Economics.
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    19. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
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    Citations

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    Cited by:

    1. Nicolás Figueroa & Carla Guadalupi, 2017. "Convincing early adopters: Price signals and Information transmission," Documentos de Trabajo 486, Instituto de Economia. Pontificia Universidad Católica de Chile..
    2. Kolotilin, Anton, 2015. "Experimental design to persuade," Games and Economic Behavior, Elsevier, vol. 90(C), pages 215-226.
    3. Hedlund, Jonas, 2017. "Bayesian persuasion by a privately informed sender," Journal of Economic Theory, Elsevier, vol. 167(C), pages 229-268.
    4. Gill, David & Sgroi, Daniel, 2012. "The optimal choice of pre-launch reviewer," Journal of Economic Theory, Elsevier, pages 1247-1260.
    5. Daniel Sgroi & Andrew J. Oswald, 2013. "How Should Peer‐review Panels Behave?," Economic Journal, Royal Economic Society, vol. 0, pages 255-278, August.
    6. Hedlund, Jonas, 2014. "Bayesian signaling," Working Papers 0577, University of Heidelberg, Department of Economics.
    7. Alonso, Ricardo & Câmara, Odilon, 2016. "Bayesian persuasion with heterogeneous priors," Journal of Economic Theory, Elsevier, vol. 165(C), pages 672-706.
    8. repec:eee:gamebe:v:104:y:2017:i:c:p:632-655 is not listed on IDEAS
    9. Gill, David & Sgroi, Daniel, 2008. "The Optimal Choice of Pre-launch Reviewer : How Best to Transmit Information using Tests and Conditional Pricing," The Warwick Economics Research Paper Series (TWERPS) 877, University of Warwick, Department of Economics.
    10. Alexei Parakhonyak & Nick Vikander, 2013. "Optimal Sales Schemes for Network Goods," Discussion Papers 13-11, University of Copenhagen. Department of Economics.
    11. Ting Liu & Pasquale Schiraldi, 2012. "New product launch: herd seeking or herd preventing?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 627-648.
    12. Ricardo Alonso & Odilon Câmara, 2016. "Persuading Voters," American Economic Review, American Economic Association, pages 3590-3605.
    13. Ricardo Alonso & Odilon Câmara, 2016. "Persuading Voters," American Economic Review, American Economic Association, pages 3590-3605.

    More about this item

    Keywords

    Bayesian Updating; Endorsements; Herding; Sequential Decision-Making; Tests;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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