Dynamic Screening with Verifiable Bankruptcy

We consider a dynamic screening model, where the agent may go bankrupt due to, for example, cash constraints. We model bankruptcy as a verifiable event that occurs whenever the agent makes a per period loss. This leads to less stringent truth-telling constraints than those considered in the existing literature. We show that, for serially independent types, the weaker constraints do not affect optimal contracting, however. Moreover, we develop a novel method to study private values settings with continuous types and show that a regularity condition that has analogues in the literature on multi-dimensional screening ensures that the optimal contract is deterministic.