Optimal contracting with private information on cost expectation and variability

Daniel Danau () and Annalisa Vinella ()

No 1007, CRIEFF Discussion Papers from Centre for Research into Industry, Enterprise, Finance and the Firm

Abstract: We study the screening problem that arises in a framework where, initially, the agent is privately informed about both the expected production cost and the cost variability and, at a later stage, he learns privately the cost realization. The specifi?c set of relevant incentive constraints, and so the characteristics of the optimal mechanism, depend ?finely upon the curvature of the principal's marginal surplus function as well as the relative importance of the two initial information problems. Pooling of production levels is optimally induced with respect to the cost variability when the principal's knowledge imperfection about the latter is sufficiently less important than that about the expected cost.

Keywords: Cost uncertainty; Multidimensional screening; Sequential screening (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cta
Date: 2010-07
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Persistent link: http://EconPapers.repec.org/RePEc:san:crieff:1007

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