Advising with Threshold Tests: Complexity, Signaling, and Effort
A benevolent advisor observes a project's complexity and posts a pass - fail threshold before the agent chooses effort. The project succeeds only if ability and effort together clear complexity. We compare two informational regimes. In the naive regime, the threshold is treated as non-informative; in the sophisticated regime, the threshold is a signal and the agent updates beliefs. We characterize equilibrium threshold policies and show that the optimal threshold rises with complexity under mil…
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