Dynamic Test Design

We study dynamic test design under the threat of manipulation. At each instant, a principal who cannot commit to future actions chooses whether to hire an agent, fire him, or continue costly probation by designing a test. The test provides information about the agent’s persistent type, which is either good or bad. After observing the test choice, the bad type can exert costly effort to manipulate the evidence and mimic the good type. Deterring manipulation imposes an endogenous information budget that limits how intensively the principal can test. We show that, except at beliefs that remain unchanged in the absence of news, equilibrium tests are one-sided: they generate only passes, which trigger hiring, or only failures, which trigger firing. Equilibrium outcomes feature either correct hiring and firing decisions after costly delay or immediate decisions that risk misallocation. With commitment, the principal instead keeps the test constant throughout probation, even when she is nearly certain of the agent’s type.