"Non-Market Screening with Investment"
with Victor Augias

Abstract :

We study how to screen agents who can make costly investments affecting their type, without monetary transfers. A principal commits to a screening mechanism that prescribes a probability of admission based on the agents’ one-dimensional type, and values admitting higher-type agents above a certain eligibility threshold. Agents are initially endowed with a privately known natural type, and can undertake costly actions that modify this type before it is revealed to the principal, aiming to increase their admission probability. We show that deterministic cutoff mechanisms are optimal for the principal. This result provides a firmer foundation and a potential explanation for the use of simple "pass or fail" rules in environments where agents may invest in response to the way screening devices are designed.