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Coarse Screening

Author

Listed:
  • Rui Sun
  • Yi Zhang

Abstract

A seller investigates a buyer before setting prices, balancing the cost of acquiring information against the gain from tailoring the contract to the buyer's private type. The optimal signal is coarse: no matter how rich the type space, the seller never needs more than three outcomes per buyer. The bound equals the number of independent post-signal decisions plus one, a quantity we call the effective policy dimension. Screening involves two decisions, whether to allocate and what to charge, giving the ternary bound. Limited liability is the source: without it, the price is pinned by the envelope, only the allocation decision remains, and signals are binary as in monitoring. The Myerson exclusion rule is an artifact of not investigating. With investigation, every marginal buyer trades with positive probability, governed by a universal function that connects information design to rational inattention. The bound holds for any strictly convex information cost.

Suggested Citation

  • Rui Sun & Yi Zhang, 2026. "Coarse Screening," Papers 2604.04405, arXiv.org.
    • Handle: RePEc:arx:papers:2604.04405
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    References listed on IDEAS

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