IDEAS home Printed from https://ideas.repec.org/a/ijb/journl/v2y2003i3p245-261.html
   My bibliography  Save this article

A Didactic Example of Linear (Multidimensional) Screening Contracts

Author

Listed:
  • Ludovic Renou

    (Department of Economics, European University Institute, Italy and Economics Division, University of Southampton, U.K.)

Abstract

This short paper proposes a didactic example on how to solve a multidimensional screening problem in the linear case. In the proposed example, shareholders of a cash-constrained firm propose to the firm management a recapitalization in counterpart of the distribution of future dividends. The capacity of the firm to distribute future dividends depends on its production costs and its technology, which are private information of the management. Thus shareholders face a (multidimensional) screening problem. We completely characterize the optimal menus of contracts that shareholders offer. Notably, we show that there always exist optimal menus of contracts with at most two contracts offered: a low dividend, low recapitalization contract and a high dividend, high recapitalization contract. This is an extreme case of bunching.

Suggested Citation

  • Ludovic Renou, 2003. "A Didactic Example of Linear (Multidimensional) Screening Contracts," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 2(3), pages 245-261, December.
  • Handle: RePEc:ijb:journl:v:2:y:2003:i:3:p:245-261
    as

    Download full text from publisher

    File URL: http://www.ijbe.org/table%20of%20content/pdf/vol2-3/vol2-3-06.PDF
    Download Restriction: no

    File URL: http://www.ijbe.org/table%20of%20content/abstract/Vol.2/No.3/06.htm
    Download Restriction: no

    References listed on IDEAS

    as
    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    2. Rochet, J. C., 1985. "The taxation principle and multi-time Hamilton-Jacobi equations," Journal of Mathematical Economics, Elsevier, vol. 14(2), pages 113-128, April.
    3. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
    4. Basov, Suren, 2001. "Hamiltonian approach to multi-dimensional screening," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 77-94, September.
    5. Carlier, Guillaume, 2001. "A general existence result for the principal-agent problem with adverse selection," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 129-150, February.
    6. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
    7. Rochet, Jean-Charles, 1987. "A necessary and sufficient condition for rationalizability in a quasi-linear context," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 191-200, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Birger Wernerfelt, 2008. "Class Pricing," Marketing Science, INFORMS, vol. 27(5), pages 755-763, 09-10.

    More about this item

    Keywords

    multidimensional screening; bunching; adverse selection; shareholders; dividends; recapitalization;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijb:journl:v:2:y:2003:i:3:p:245-261. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yi-Ju Su). General contact details of provider: http://edirc.repec.org/data/cbfcutw.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.