Reputation Concerns in Risky Experimentation
ISER Discussion Paper No. 1060
43 Pages Posted: 25 Jul 2019
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: Suggested Citation