Journal Article

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

Raphael Boleslavsky and Maher Said

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 80, issue 1, pages 1-34
Published in print January 2013 | ISSN: 0034-6527
Published online May 2012 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rds021
Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process

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  • Information, Knowledge, and Uncertainy
  • Game Theory and Bargaining Theory

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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, the realized values are also private information. We characterize a class of environments in which the profit-maximizing long-term contract offered by a monopolist takes an especially simple structure: we derive sufficient conditions on primitives under which the optimal contract consists of a menu of deterministic sequences of static contracts. Within each sequence, higher realized values lead to greater quantity provision; however, an increasing proportion of buyer types are excluded over time, eventually leading to inefficiently early termination of the relationship. 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 process information in the initial period and then progressively screens across realized values so as to reduce the information rents paid in future periods.

Keywords: Asymmetric information; Dynamic incentives; Dynamic mechanism design; Long-term contracts; Sequential screening; C73; D82; D86

Journal Article.  12496 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Game Theory and Bargaining Theory

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