Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process
AbstractWe 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 real- ized 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 re- lationship). 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 re- duce the information rents paid in future periods.
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Bibliographic InfoPaper provided by University of Miami, Department of Economics in its series Working Papers with number 2011-5.
Length: 45 pages
Date of creation: 2011
Date of revision:
Publication status: Forthcoming: Under Review
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Asymmetric information; Dynamic mechanism design; Long-term contracts; Term life insurance; Sequential screening.;
Other versions of this item:
- Raphael Boleslavsky & Maher Said, 2013. "Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 1-34.
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-16 (All new papers)
- NEP-CTA-2011-09-16 (Contract Theory & Applications)
- NEP-MIC-2011-09-16 (Microeconomics)
- NEP-ORE-2011-09-16 (Operations Research)
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