Events at CERGE-EI

Prof. Ines Moreno de Barreda

University of Oxford, United Kingdom

Authors: Ines Moreno de Barreda, Evgenii Safonov

Abstract: An agent with a privately known continuous type applies for approval. While the agent always prefers approval over rejection, approving an agent with low type has social costs. The agent sends a report about her type that she can inflate by engaging in signaling costs that have the single-crossing property. We study approval mechanisms without transfers that maximize a social welfare function that takes into consideration both the approval decision and the signaling costs of the agent. We show that threshold approval rules, which are widespread in society, are never socially optimal. By introducing some randomness in the rule, we can reduce the signaling costs without substantially changing the screening of the rule. If we further assume that the marginal cost is strictly log-supermodular, an assumption satisfied by the quadratic-loss function, we show that the optimal approval mechanism induces an approval probability that is continuous in the agent's type. We provide necessary first-order conditions for the optimal rule, and illustrate them with an analysis of the case of quadratic-loss function and uniform distribution of the agents' types.