A Note on the Limited Value of Time for Screening

Roman Inderst

No 98-33, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: We analyze a bargaining model with one-sided uncertainty where the uninformed party makes all offers. In difference to the literature we allow contracts to include a variable in which the informed party's utility satisfies a standard sorting condition. For instance, a union on strike might offer to a firm with private information about its profitability a sequence of contracts specifying wages and working hours. We solve the model for the two-type case and find that for sufficiently high discount factors delay is not used to screen among types as this would fully erode the screening power of the additional sorting variable. The analysis in this paper also complements the standard principal-agent setting where attention is usually restricted to the case where the (uninformed) principal can commit to a take-it-or-leave-it offer. In contrast, the threat to walk away after rejection is not credible with an infinite time horizon.

Pages: 16 pages
Date: 1998-10-15
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. I thank seminar participants at the annual conference of the Royal Economic Society 1998 and at EEA'98.
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