Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process

Ralph Boleslavsky and Maher Said
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Ralph Boleslavsky: Department of Economics, University of Miami

No 2011-5, Working Papers from University of Miami, Department of Economics

Abstract: We examine a model of long-term contracting in which the buyer is privately informed about the stochastic process by which her value for a good evolves. In addition, her realized values are also her private information. We characterize the profit-maximizing long-term contract offered by a monopolist in this setting. This optimal contract consists of a menu of deterministic sequences of static contracts. Within each sequence, higher realized values lead to greater quantity provision; however, an increasing proportion of buyer types are excluded over time (eventually leading to inefficient early termination of the relationship). Moreover, the menu choices differ by future generosity, with more costly (up- front) plans guaranteeing greater quantity provision in the future. Thus, the seller screens buyers in the initial period, and then progressively screens additional buyers so as to reduce the information rents paid in future periods.

Keywords: Asymmetric information; Dynamic mechanism design; Long-term contracts; Term life insurance; Sequential screening. (search for similar items in EconPapers)
JEL-codes: C73 D82 D86 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011
New Economics Papers: this item is included in nep-cta, nep-mic and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Forthcoming: Under Review

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https://www.herbert.miami.edu/_assets/files/repec/wp2011-5.pdf First version, 2011 (application/pdf)

Related works:
Journal Article: Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mia:wpaper:2011-5

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