Optimal Screening with Costly Misrepresentation

We study mechanism design in environments where misrepresenting private information is costly. Specifically, a privately informed agent has to take several signalling actions, send several messages or undergo a number of tests in which it is costly for her to misrepresent her type. We derive the optimal mechanism for this environment. A surprising property of the optimal mechanism is the absence of exclusion. Particularly, in the monopoly screening setting every type of consumer whose valuation for the good exceeds the marginal cost of production is allocated a positive quantity. We also establish conditions under which the set of implementable allocation profiles increases in the number of messages/signals while the overall cost of signalling diminishes. In the limit, as the number of messages becomes very large, the principal can elicit the agent’s private information at a very small cost. Our results explain why employers often prefer to screen applicants via multiple rounds of interviews rather than via menus of contracts, and why the welfare losses due to unproductive signalling (“rat race”) may not be too large. JEL Nos: C72, D82