Mechanism Design With Ex-Post Verification And Limited Punishments

A principal has to give a job to one of several applicants. Each applicant values the job and has private information regarding the value to the principal of giving the job to him. The wage is exogenously fixed, but the principal will eventually learn the value of the applicant whom she hires after which she can impose a limited penalty on this applicant (e.g., fire him). If the number of applicants is high, the optimal hiring rule is a shortlisting procedure. Otherwise, the optimal hiring rule is a restricted bid auction, in which the applicants bid their value for the principal, possibly augmented by a shortlisting procedure for the applicants with minimal bids. From a methodological perspective, the paper provides a solution to a novel mechanism design problem without transfers that features a nontrivial interaction of incentive and feasibility constraints.