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

Review of Economic Studies, 80(1), 1-34

37 Pages Posted: 5 Jun 2011 Last revised: 5 May 2013

See all articles by Raphael Boleslavsky

Raphael Boleslavsky

University of Miami - School of Business Administration - Department of Economics

Maher Said

NYU Stern School of Business

Date Written: April 12, 2013

Abstract

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

JEL Classification: C73, D82, D86

Suggested Citation

Boleslavsky, Raphael and Said, Maher, Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process (April 12, 2013). Review of Economic Studies, 80(1), 1-34, Available at SSRN: https://ssrn.com/abstract=1798187 or http://dx.doi.org/10.2139/ssrn.1798187

Raphael Boleslavsky

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

Maher Said (Contact Author)

NYU Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

HOME PAGE: http://www.mahersaid.com/

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