THE UNIVERSITY OF CHICAGO
Primary Research Focus: Microeconomic Theory, Mechanism and Information Design, Matching
Secondary Research Focus: Experimental and Behavioral Economics
References: Ben Brooks, Doron Ravid, Emir Kamenica, Phil Reny
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Abstract
A principal seeks to maximize the chances of passing a good quality agent by testing his knowledge of a subject matter, modeled as a binary state. Higher quality agents possess more precise information. I show that the optimal test takes a “pick the correct answer” form, with at most three options. While the efficient test only rewards correctness, without regard to the degree of ex-ante obviousness of the answer, screening leads to under-rewarding of “obvious” answers and over-rewarding of “counterintuitive” ones, when there is such an
ex-ante obvious answer. When the principal can pick the question however, she picks one with no ex-ante obvious answer, so that the optimal test, once again, rewards only correctness. In particular, in this case the optimal test is the simple True-False test ubiquitous in the real world, regardless of all other details.