Signalling, screening and costly misrepresentation

When misrepresenting private information is costly and each type has a different “natural” least-cost signal or message, the availability of multiple signals has a significant effect on signalling equilibria and on the set of implementable outcomes in a screening context. In particular, welfare losses associated with costly signalling disappear as the number of available signals increases, yet at the same time each type is identified with a high degree of precision in every equilibrium satisfying a dominance criterion. In the screening context, we establish conditions under which the principal can implement an arbitrary allocation profile at a small communication cost. This result helps to explain why employers often prefer to screen applicants via multiple interviews rather than via menus of contracts. We also derive an optimal screening mechanism in such a setting. A surprising property of this mechanism is the absence of exclusion.