Sequential Decisions with Tests

David Gill () and Daniel Sgroi

No 242, Economics Series Working Papers from University of Oxford, Department of Economics

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.

Keywords: Bayesian Updating; Endorsements; Herding; Sequential Decision-Making; Tests (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2005
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Journal Article: Sequential decisions with tests (2008)
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