Reputation Concerns in Risky Experimentation

ISER Discussion Paper No. 1060

43 Pages Posted: 25 Jul 2019

See all articles by Chia‐Hui Chen

Chia‐Hui Chen

Kyoto University - Institute of Economic Research

Junichiro Ishida

Osaka University - Institute of Social and Economic Research

Wing Suen

The University of Hong Kong - School of Economics and Finance

Date Written: July 1, 2019

Abstract

We develop a general model, with the exponential bandit as a special case, in which high-ability agents are more likely to achieve early success but also learn faster that their project is not promising. These counteracting effects give rise to a signaling model in which the single-crossing condition fails but a double-crossing property holds. We characterize the unique D1 equilibrium under double-crossing condition, and show that it tends to produce pooling. Ability to identify good projects and ability to execute a good project have different implications for the equilibrium allocation. Our model also incorporates public news, which generates dynamic distortions.

Keywords: double-crossing property, D1 equilibrium refinement, dynamic signaling, venture startups

JEL Classification: D82, D83, O31

Suggested Citation

Chen, Chia‐Hui and Ishida, Junichiro and Suen, Wing C., Reputation Concerns in Risky Experimentation (July 1, 2019). ISER Discussion Paper No. 1060, Available at SSRN: https://ssrn.com/abstract=3418041 or http://dx.doi.org/10.2139/ssrn.3418041

Chia‐Hui Chen

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
JAPAN

Junichiro Ishida (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

Wing C. Suen

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
852 2859 1052 (Phone)
852 2548 1152 (Fax)

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