Dynamic Test Design

Doruk Cetemen () and Francesc Dilme ()
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Doruk Cetemen: LUISS and EIEF
Francesc Dilme: University of Bonn

No 444, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We study dynamic test design under the threat of manipulation. At each instant, a principal who cannot commit to future actions chooses whether to hire an agent, fire him, or keep him on costly probation and design a test. The test provides information about the agent’s persistent type, which is either good or bad. After observing the test choice, the bad type can exert costly effort to manipulate the evidence and mimic the good type. Deterring manipulation imposes an endogenous information budget that limits how intensively the principal can test. We show that, except at beliefs that remain unchanged in the absence of news, equilibrium tests are one-sided: they generate only passes, which trigger hiring, or only failures, which trigger firing. Equilibrium outcomes feature either correct hiring and firing decisions after costly delay or immediate decisions that risk misallocation. With commitment, an optimal policy either stops immediately or keeps the test constant throughout probation, even as the principal becomes nearly certain of the agent’s type.

Keywords: Dynamic testing; Poisson monitoring; optimal stopping (search for similar items in EconPapers)
JEL-codes: C73 D82 D83 D86 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2026-11
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:444

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