Sequential Decisions with Tests
University of Oxford - Department of Economics
University of Warwick - Department of Economics
June 18, 2009
Games and Economic Behavior, Vol. 63, No. 2, pp. 663-678, 2008
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.
Number of Pages in PDF File: 19
Keywords: herding, cascade, learning, herd manipulation, tests, information transmission, endorsement, sequential decisions, public test, tough testAccepted Paper Series
Date posted: June 18, 2009 ; Last revised: June 19, 2009
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