Gatekeeping, Selection, and Welfare

Francesco Del Prato and Paolo Zacchia

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Abstract: We study staged entry with costly gatekeeping in a differentiated-products economy: entrepreneurs observe noisy signals before paying a resource-intensive activation cost. Precision improves selection but requires more resources, reducing entry and variety: welfare need not rise with precision. Under CES preferences, the activation cutoff is efficient as profit displacement offsets the consumer-surplus gain from variety. Welfare losses arise from verification costs shrinking the feasible set of varieties, not from misaligned incentives. Because the market responds efficiently to any given regime, these losses cannot be corrected via Pigouvian taxes.

Date: 2025-05, Revised 2026-02
New Economics Papers: this item is included in nep-ent, nep-fdg and nep-ind
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