The optimal choice of pre-launch reviewer: how best to transmit information using tests and conditional pricing

Abstract

A principal who knows her type can face public testing to help attract endorsements from agents. Tests are pass/fail and have an innate toughness (bias) corresponding to a trade-off between the higher probability of passing a softer test and the greater impact on agents’ beliefs from passing a tougher test. Conditional on the test result, the principal also selects the price of endorsement. The principal always wants to be tested, and chooses the toughest or softest test available depending upon the precision of the agents’ and tests’ information. Applications abound in industrial organization, political economy and labor economics