| Abstract: |
A principal can propose a project to an agent, who then decides whether to accept. Their payoffs from launching the project depend on an unknown binary state. The principal can acquire more precise information about the state through a test at no cost, but crucially, it is common knowledge that she can falsify the test result. In the case where players have conflicting interests, the optimal test is a binary lemon-detecting test. We also find that coordination is possible when the principal is pessimistic but not when the agent is pessimistic. Moreover, when the agent possesses private information about the state, a single binary lemon-detecting test remains optimal even though the principal has the option to screen the agent by providing a menu of tests. Our finding aligns with observed tests in real-world practices.
|
