Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process
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.
|Date of creation:||2011|
|Publication status:||Forthcoming: Under Review|
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