Strategic Manipulation of Empirical Tests

Theories can be produced by individuals seeking a good reputation of knowledge. Hence, a significant question is how to test theories anticipating that they might have been produced by (potentially uninformed) experts who prefer their theories not to be rejected. If a theory that predicts exactly like the data generating process is not rejected with high probability then the test is said to not reject the truth. On the other hand, if a false expert, with no knowledge over the data generating process, can strategically select theories that will not be rejected then the test can be ignorantly passed. These tests have limited use because they cannot feasibly dismiss completely uninformed experts. Many tests proposed in the literature (e.g., calibration tests) can be ignorantly passed. Dekel and Feinberg (2006) introduced a class of tests that seemingly have some power of dismissing uninformed experts. We show that some tests from their class can also be ignorantly passed. One of those tests, however, does not reject the truth and cannot be ignorantly passed. Thus, this empirical test can dismiss false experts. ∗We thank Eddie Dekel, Yossi Feinberg, Nabil Al-Najjar, Sandeep Baliga, Roger Myerson and Rakesh Vohra for useful comments. All errors are ours. †Department of Economics, Northwestern University, 2001 Sheridan Road Evanston IL 60208 ‡Department of Economics, University of Pennsylvania, 3718 Locust Walk, Phildadelphia PA 19104 and Department of Managerial Economics and Decision Sciences, Kellogg School of Management, Northwestern University, 2001 Sheridan Road Evanston IL 60208 We also show that a false reputation of knowledge can be strategically sustained for an arbitrary, but given, number of periods, no matted which test is used (provided that it does not reject the truth). However, false experts can be discredited, even with bounded data sets, if the domain of permissible theories is mildly restricted.