Dynamic screening with liquidity constraints

Daniel Krähmer () and Roland Strausz ()
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Daniel Krähmer: Universität of Bonn
Roland Strausz: Humboldt Universität zu Berlin

Economic Theory, 2025, vol. 79, issue 4, No 10, 1453 pages

Abstract: Abstract We consider a dynamic screening model with serially independent types where the agent is short-term liquidity constrained. We model a liquidity constraint as a hard constraint that forces the agent to renege whenever he would suffer a loss from fulfilling the contract terms in a given period. In particular, the violation of a liquidity constraint is a verifiable event that future contract terms can condition on. This verifiability leads to less stringent truth-telling constraints than those considered in the existing literature. We show that the weaker constraints do not affect optimal contracting, however. Moreover, we develop a novel method to study private values settings with continuous types and show that a regularity condition that has analogues in the literature on multi-dimensional screening ensures that the optimal contract is deterministic.

Keywords: Dynamic screening; Liquidity constraints; Verifiability; Mean preserving spread (search for similar items in EconPapers)
JEL-codes: D82 H57 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00199-024-01616-2

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