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Sequential Decisions with Tests

  • David Gill
  • Daniel Sgroi

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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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 242.

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Date of creation: 01 Jul 2005
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Handle: RePEc:oxf:wpaper:242
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  1. Chiao, Benjamin & Lerner, Josh & Tirole, Jean, 2007. "The Rules of Standard Setting Organizations: An Empirical Analysis," CEPR Discussion Papers 6141, C.E.P.R. Discussion Papers.
  2. Smith, L. & Sorensen, P., 1996. "Pathological Outcomes of Observational Learning," Working papers 96-19, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Josh Lerner & Jean Tirole, 2004. "A Model of Forum Shopping, with Special Reference to Standard Setting Organizations," NBER Working Papers 10664, National Bureau of Economic Research, Inc.
  4. Sgroi, D., 2000. "Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare," Economics Papers 2000-w14, Economics Group, Nuffield College, University of Oxford.
  5. Marco Ottaviani & Andrea Prat, 2001. "The Value of Public Information in Monopoly," Econometrica, Econometric Society, vol. 69(6), pages 1673-1683, November.
  6. 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.
  7. Albano, Gian Luigi & Lizzeri, Alessandro, 2001. "Strategic Certification and Provision of Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 267-83, February.
  8. 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.
  9. David Gill & Daniel Sgroi, 2011. "The Optimal Choice of Pre-Launch Reviewer," Economics Series Working Papers 562, University of Oxford, Department of Economics.
  10. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, vol. 76(4), pages 716-27, September.
  11. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  12. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927.
  13. repec:tpr:qjecon:v:107:y:1992:i:3:p:797-817 is not listed on IDEAS
  14. 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.
  15. Gill, D. & Sgroi, D., 2003. "The Superiority of Tough Reviewers in a Model of Simultaneous Sales," Cambridge Working Papers in Economics 0335, Faculty of Economics, University of Cambridge.
  16. Josh Lerner & Jean Tirole, 2006. "A Model of Forum Shopping," American Economic Review, American Economic Association, vol. 96(4), pages 1091-1113, September.
  17. 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.
  18. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019.
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