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Sequential Screening and Renegotiation

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  • Reiche, S.
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    Abstract

    This paper considers a sequential screening problem. A seller sells an object to a buyer who is privately informed about the object's value. The value has two components. The buyer knows the first component when he contracts with the seller and learns the second component only later. The optimal contract when there is no commitment problem is a sequential mechanism in form of a menu of fee-price pairs. Paying the initial fee gives the buyer the right to purchase the good later at the corresponding price. High initial buyer types pay a high fee for a low price later. Each buyer chooses a different fee-price pair. If commitment is not feasible, the structure of the optimal contract is simpler. The optimal contract is either no contract, a simple forcing contract, or a contract in which high types buy for sure and low types pay an initial fee to buy the good at a price later. The di¤erence to the setting with commitment is that all low buyer types obtain the same fee-price pair and all high buyer types buy for sure. There is no fine-tuning to specific buyer types. This might explain some simple real life sales agreements and why firms might find it optimal to group consumers into specific customer groups.

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    File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0820.pdf
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    Bibliographic Info

    Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0820.

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    Length: 24
    Date of creation: Apr 2008
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    Handle: RePEc:cam:camdae:0820

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    Web page: http://www.econ.cam.ac.uk/index.htm

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    1. Pascal Courty & Li Hao, 1997. "Sequential screening," Economics Working Papers 224, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Oliver D. Hart & Jean Tirole, 1987. "Contract Renegotiation and Coasian Dynamics," Working papers 442, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Daniel Kr�mer & Roland Strausz, 2009. "Optimal Procurement Contracts with Pre--Project Planning," Papers 036, Departmental Working Papers.
    4. Andreas Blume, 1998. "Contract Renegotiation with Time-Varying Valuations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(3), pages 397-433, 09.
    5. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
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