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Sequential Decisions with Tests

Author

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  • David Gill
  • Daniel Sgroi
  • Faculty of Economics and Churchill College
  • University of Cambridge

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.

Suggested Citation

  • David Gill & Daniel Sgroi & Faculty of Economics and Churchill College & University of Cambridge, 2005. "Sequential Decisions with Tests," Economics Series Working Papers 242, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:242
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    References listed on IDEAS

    as
    1. 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.
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    Citations

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    Cited by:

    1. Nicolás Figueroa & Carla Guadalupi, 2017. "Convincing early adopters: Price signals and Information transmission," Documentos de Trabajo 486, Instituto de Economia. Pontificia Universidad Católica de Chile..
    2. Eduardo Perez-Richet, 2014. "Interim Bayesian Persuasion: First Steps," American Economic Review, American Economic Association, vol. 104(5), pages 469-474, May.
    3. Daniel Sgroi & Andrew J. Oswald, 2013. "How Should Peer‐review Panels Behave?," Economic Journal, Royal Economic Society, vol. 0, pages 255-278, August.
    4. Gill, David & Sgroi, Daniel, 2012. "The optimal choice of pre-launch reviewer," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1247-1260.
    5. Rosar, Frank, 2017. "Test design under voluntary participation," Games and Economic Behavior, Elsevier, vol. 104(C), pages 632-655.
    6. Anton Kolotilin & Tymofiy Mylovanov & Andriy Zapechelnyuk & Ming Li, 2017. "Persuasion of a Privately Informed Receiver," Econometrica, Econometric Society, vol. 85(6), pages 1949-1964, November.
    7. Ricardo Alonso & Odilon Câmara, 2016. "Persuading Voters," American Economic Review, American Economic Association, vol. 106(11), pages 3590-3605, November.
    8. repec:hal:spmain:info:hdl:2441/17ekir5v8r8l6qbj0nnrfv4k2h is not listed on IDEAS
    9. Alexei Parakhonyak & Nick Vikander, 2019. "Optimal Sales Schemes for Network Goods," Management Science, INFORMS, vol. 65(2), pages 819-841, February.
    10. Gill, David & Sgroi, Daniel, 2008. "The Optimal Choice of Pre-launch Reviewer : How Best to Transmit Information using Tests and Conditional Pricing," The Warwick Economics Research Paper Series (TWERPS) 877, University of Warwick, Department of Economics.
    11. Alonso, Ricardo & Câmara, Odilon, 2018. "On the value of persuasion by experts," Journal of Economic Theory, Elsevier, vol. 174(C), pages 103-123.
    12. Kolotilin, Anton, 2015. "Experimental design to persuade," Games and Economic Behavior, Elsevier, vol. 90(C), pages 215-226.
    13. Alonso, Ricardo & Câmara, Odilon, 2016. "Bayesian persuasion with heterogeneous priors," Journal of Economic Theory, Elsevier, vol. 165(C), pages 672-706.
    14. repec:spo:wpmain:info:hdl:2441/17ekir5v8r8l6qbj0nnrfv4k2h is not listed on IDEAS
    15. Hedlund, Jonas, 2017. "Bayesian persuasion by a privately informed sender," Journal of Economic Theory, Elsevier, vol. 167(C), pages 229-268.
    16. Saltuk Ozerturk, 2018. "Choosing a media outlet when seeking public approval," Public Choice, Springer, vol. 174(1), pages 3-21, January.
    17. Nicollier, Luciana, 2013. "Reviews, Prices and Endogenous Information Transmission," Economic Research Papers 270430, University of Warwick - Department of Economics.
    18. Vidya Atal & Talia Bar, 2014. "Patent Quality and a Two-Tiered Patent System," Journal of Industrial Economics, Wiley Blackwell, vol. 62(3), pages 503-540, September.
    19. Arianna Degan & Ming Li, 2021. "Persuasion with costly precision," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(3), pages 869-908, October.
    20. Hedlund, Jonas, 2014. "Bayesian signaling," Working Papers 0577, University of Heidelberg, Department of Economics.
    21. Ting Liu & Pasquale Schiraldi, 2012. "New product launch: herd seeking or herd preventing?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(3), pages 627-648, November.

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    More about this item

    Keywords

    Bayesian Updating; Endorsements; Herding; Sequential Decision-Making; Tests;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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