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

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  • Ralph Boleslavsky

    (Department of Economics, University of Miami)

  • Maher Said

    (Olin Business School, Washington University in St. Louis)

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 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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File URL: http://www.bus.miami.edu/_assets/files/faculty-and-research/academic-departments/eco/eco-working-papers/2011/WP2011-5.pdf
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Bibliographic Info

Paper provided by University of Miami, Department of Economics in its series Working Papers with number 2011-5.

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Length: 45 pages
Date of creation: 2011
Date of revision:
Publication status: Forthcoming: Under Review
Handle: RePEc:mia:wpaper:2011-5

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Related research

Keywords: Asymmetric information; Dynamic mechanism design; Long-term contracts; Term life insurance; Sequential screening.;

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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. Steven Matthews & John Moore, 1985. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Discussion Papers 661, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Loginova, Oksana & Taylor, Curtis, 2003. "Price Experimentation with Strategic Buyers," Working Papers 03-02, Duke University, Department of Economics.
  4. Krähmer, Daniel & Strausz, Roland, 2010. "Optimal Procurement Contracts with Pre–Project Planning," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 303, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Dirk Bergemann & Juuso Valimaki, 2008. "The Dynamic Pivot Mechanism," Cowles Foundation Discussion Papers 1672, Cowles Foundation for Research in Economics, Yale University.
  6. Marco Battaglini, 2005. "Long-Term Contracting with Markovian Consumers," American Economic Review, American Economic Association, vol. 95(3), pages 637-658, June.
  7. Chifeng Dai & Tracy R. Lewis & Giuseppe Lopomo, 2006. "Delegating Management to Experts," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 503-520, Autumn.
  8. Alessandro Pavan, 2007. "Long Term Contracting in a Changing World," Discussion Papers 1493, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Andrzej Skrzypacz & Simon Board, 2011. "Revenue Management with Forward-Looking Buyers," 2011 Meeting Papers 87, Society for Economic Dynamics.
  10. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.
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