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Presented By: Department of Economics

Economic Theory: Test Design and Minimum Standards

Andy Skrzypacz, Stanford Graduate School of Business

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Abstract

An uninformed seller may demonstrate quality by disclosing results from a certification test, or may hide unfavorable results. We consider a setting with strategic test choice and disclosure policy, and characterize the unique equilibrium outcome. Although without strategic disclosure all tests yield the same expected sale price, the agent’s ability to hide results leads to a unique test choice. While in equilibrium the agent generally prefers more informative tests, the amount of information disclosed in equilibrium is inefficient and simple pass/fail tests are likely to dominate the market. Minimum testing standards can improve informational efficiency and reduce test-taking costs.

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