Screening through Coordination

Under standard screening techniques, the principal tailors her actions to the preferences associated with the agents’ reported types.  However, in a number of natural economic situations, agents can have preferences that do not vary with their type, making this standard technique infeasible.  Instead, we show how a principal who faces multiple agents and whose preferences exhibit complementarities across those agents, can benefit by coordinating her actions.  Coordination delivers a payoff gain to the principal on states with more high quality agents and accepts a payoff loss on states with more low quality agents.  This strategy leverages the structure of the principal’s preferences by performing well when there are strong complementarities to benefit from, and accepting a poor performance when the complementarities are weak.  Coordination sometimes results in counter-intuitively favouring an agent who is inferior for the principal’s low aims.  This behaviour, which we call strategic favouritism, is often assumed to be inefficient and to arise from the biases of the principal.  A key insight of our work is that favouritism can arise from strategic considerations and be optimal for an unbiased principal.