Alternatively, the principal might choose to extend oversight authority during the reporting stage. Our model considers each of these cases. As the main result of the paper, we show that oversight of the test design stage always improves the welfare of the principal while oversight of the test reporting stage may not. In addition, we consider the case in which the principal can extend oversight authority over both test design and test reporting.

We believe that the model describes a wide variety of interesting situations—The promotion of assistant professors in disciplines with exceptionally thin job markets, for example. Individual departments make assessments of candidates and report to the tenure committee. Although the tenure committee makes the final decision, the departments have the necessary expertise to gather the relevant data. Typically the tenure committee establishes the criteria by which individual departments judge the candidates. In the context of our model this is interpreted as oversight of the test design phase. Another interesting application is found in the operational test and evaluation procedures used by the Department of Defense. It is in this context that we develop the model.

The Department of Defense engages in two types of testing throughout the acquisition cycle. The emphasis in developmental testing is on isolating and measuring performance characteristics of individual components of a system. Developmental testing is conducted in a carefully controlled environment by highly trained technical personnel. The emphasis in operational testing, however, is on evaluating the overall capabilities and limitations of the complete system in a realistic operating environment. Operational testing is therefore conducted in a less controlled environment by trained users of the system. It is the role of this type of testing in the acquisition cycle that we investigate below.

The acquisition cycle follows a series of event based decisions called milestones.1 At each milestone a set of criteria must be met in order to proceed with the next phase of acquisition. Operational testing is one of the last stages in this cycle.

When a system is ready for operational testing, the exact details of the test are prepared by the independent test agencies within each Service. Tests must be prepared in accordance with


 The interested reader is urged to see the interim report from the Panel on Statistical Methods for Defense Testing (National Research Council, 1995) for a complete description of the current acquisition cycle.

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