Screening With Endogenous Reservation Values

Roman Inderst

No 98-32, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Contract design under incomplete information is typically analyzed in a bilaterally monopolistic setting. This holds particularly for screening games with transferable utility and private values. If the informed party's reservation value does not depend on its private information (its type), it is a standard result that the uninformed side offers low types distorted contracts to reduce the high types' information rent. We challenge this result in a matching market where in each match either side may be chosen to make a one-shot proposal. The option to switch to another match allows to endogenize reservation values. As frictions become sufficiently low, we find that in any market equilibrium contracts are free of distortions.

Pages: 24 pages
Date: 1998-10-04
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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