Optimality of sequential screening with multiple units and ex post participation constraints

We show that in sequential screening problems with ex post participation constraints, optimal contracts elicit the agent’s pay-off irrelevant ex ante information when the principal and agent can trade multiple units, in contrast to when they can trade a single unit only. The difference arises becaus...

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Bibliographic Details
Published inEconomics letters Vol. 142; pp. 64 - 68
Main Authors Krähmer, Daniel, Strausz, Roland
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.05.2016
Elsevier Science Ltd
Subjects
Agency theory
ex post participation constraints
Mathematical problems
Output
Price variance
Sequential screening
Static screening
Studies
Sequential screening
Static screening
ex post participation constraints
D82
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Summary:We show that in sequential screening problems with ex post participation constraints, optimal contracts elicit the agent’s pay-off irrelevant ex ante information when the principal and agent can trade multiple units, in contrast to when they can trade a single unit only. The difference arises because with multiple units, the principal can price each unit differently, giving rise to a larger number of screening instruments. Optimal contracts implement output schedules that are not monotone in the initial information. We identify regularity conditions which ensure that non-monotone schedules are incentive compatible. •With multiple units and ex post participation constraints, optimal contracts screen sequentially.•Optimal contracts implement non-monotone output schedules.•Regularity conditions are supplied to ensure their incentive compatibility.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2016.03.010