Screening by (In)accurate Inspection

46 Pages Posted: 17 Apr 2024 Last revised: 22 Apr 2024

See all articles by Gaoji Hu

Gaoji Hu

Shanghai University of Finance and Economics - School of Economics

Date Written: April 17, 2024

Abstract

A principal faces the decision of allocating an indivisible object to an agent, where the agent possesses private information, or "type," regarding the principal's payoff from the allocation. To screen the agent, the principal can inspect him and acquire a signal about his private type, where the inspection cost increases in the signal accuracy. A direct mechanism in this setting consists of an allocation rule which specifies the probability of allocation, and an inspection rule which sets the inspection probability and accuracy. We characterize the set of incentive-compatible mechanisms and find the optimal mechanism within the class of deterministic ones. We show that the most accurate inspections are seldom utilized by the principal. This insight extends to the principal's ex ante decision to acquire a signal (uniform accuracy for all agent types), where the highest accuracy is again deemed non-optimal.

Keywords: mechanism design, costly verification, (in)accurate inspection, experiment comparison, information acquisition.

JEL Classification: D61, D82

Suggested Citation

Hu, Gaoji, Screening by (In)accurate Inspection (April 17, 2024). Available at SSRN: https://ssrn.com/abstract=4797356 or http://dx.doi.org/10.2139/ssrn.4797356

Gaoji Hu (Contact Author)

Shanghai University of Finance and Economics - School of Economics ( email )

777 Guoding Road
Shanghai, 200433
China

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