Mechanism Design under Costly Signaling: the Value of Non-Coordination

Abstract

We study allocation mechanisms that utilize costly signaling as a screening tool. A social planner aims to maximize social welfare, defined as the weighted sum of agents' utilities, while implementing a specific allocation rule. Within a broad class of agent preferences, we show that coordination mechanisms (where recommended signals depend on joint reports) can be outperformed by non-coordination mechanisms (where signals depend solely on individual reports). We formalize the conditions under which the optimal mechanism features no coordination and demonstrate that such mechanisms are implementable through coarse-ranking contests.