DP12271 Information Design under Falsification

Author(s): Eduardo Perez-Richet, Vasiliki Skreta
Publication Date: September 2017
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Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12271

We derive an optimal test when cheating is possible in the form of type falsification. Optimal design exploits the following trade-off: while cheating may lead to better grades, it devalues their meaning. We show that optimal tests can be derived among cheating- proof ones. Our optimal test has a single 'failing' grade, and a continuum of 'passing' grades. It makes the agent indifferent across all moderate levels of cheating. Good types never fail, but bad types may pass. An optimal test delivers at least half of the full information value. A three-grade optimal test also performs well