The primary purpose of this study is to investigate the impact of the local item dependence (LID) of testlet items on the performance of the multistage tests (MST) that make pass/fail decisions. In this study, LID is simulated in testlet items. Testlet items are those that physically share the same stimulus. In the MST design, the proportion of testlet items is a manipulated factor. Other studied factors include testlet item position, LID magnitude, and test length. The second purpose of this study is to use a testlet response model to account for LID in the context of MSTs. The possible gains of using a testlet model against a standard IRT model are evaluated. The results indicate that under the simulated conditions, the testlet item position has a very minimal effect on the precision of ability estimation and decision accuracy, while the item pool structure (the proportion of testlet items), the LID magnitude and test length have fairly substantial effects. Ignoring the LID effects and fitting a unidimensional 3PL model result in the loss of ability estimation precision and decision accuracy. The ability estimation is adversely impacted by larger proportion of testlet items, the moderate and high LID levels and short test lengths. As the LID condition gets worse (large LID magnitude, or large proportion of testlet items), the decision accuracy rates decrease. Fitting a 3PL testlet response model does not reach the same level of ability estimation precision under all simulations conditions. In fact, it proves that ignoring LID and fitting the 3PL model provides inflated ability estimation precision and the accuracy of decision accuracies.