Screening for Mr. Good Bob: Another ‘Starting Small’ Paper

Speaker: 
Affilation: 
Semester: 
Date : 

The prescription to “start small” in a new and prospectively longrun relationship—whether (for instance) in a B2B relationship (as in the Toyota system of strategic subcontractors) or in a organization that operates an internal labor market (where the firm is screens new employees in entrylevel jobs)—is offered for several reasons. This paper explores a simple and stylized model, to (possibly) gain insight into one story behind this prescription: Alice, able to enter into a relationship with Bob, has a general prioroverBob’s “intentions”withregardtoher andemploys “startingsmall” to screen for good types of Bob. While the well-known story is that Alice starts small to get evil types of Bob to reveal themselves early on and at reduced cost to Alice, we find an alternative: Alice optimally starts small to encourage evil (but patient) types to hang around: She benefits from their good behavior while they wait, while discounting reduces the impact of their evil behavior when finally they reveal themselves as evil. (An evil type is one who enters into a relationship with Alice in order, at some point, to treat her poorly.) We see, then, that Alice does best with evil types who are either very impatient or very patient; she does worst with Evil Bobs whose patience (appropriately defined) matches her own. We also characterize Alice’s best strategy when dealing with multiple (possible) flavors of Evil Bob and explore how different flavors of Evil Bob (in Alice’s prior) interact.

Place: