Assortative Mechanisms in Screening without Transfers

A principal makes a binary decision on each of n agents. Agents have type-independent preferences: every type of every agent prefers action 1 to action 0. Since there are no transfers, a mechanism is incentive compatible only if the marginal probability of taking action 1 on an agent does not depend on his type. When the principal's payoff function exhibits complementarities across agents, she can benefit from an assortative mechanism. Relative to the default action 0, assortative mechanisms improve the principal's payoff in states with many high-quality agents (by frequently taking the action 1 on high types), but take a payoff loss necessary for incentive compatibility in states with many low-quality agents (by taking action 1 on low types). We also find that in some environments the marginal probability of taking action 1 is higher for an ex-ante inferior agent, a phenomenon we call strategic favoritism.