Working Paper: CEPR ID: DP13018
Authors: Dirk Bergemann; Francisco Castro; Gabriel Weintraub
Abstract: We study the classic sequential screening problem in the presence of buyers' ex-post participation constraints. A leading example is the online display advertising market, in which publishers frequently do not use up-front fees and instead use transaction-contingent fees.We establish conditions under which the optimal selling mechanism is static and buyers are not screened with respect to their interim type, or sequential and the buyers are screened with respect to their interim type. In particular, we provide an intuitive necessary and sufficient condition under which the static contract is optimal for general distributions of ex-post values.Further, we completely characterize the optimal sequential contract with binary interim types and continuum of ex-post values when this condition fails. Importantly, the latter contract randomizes the allocation of the low type buyer while giving a deterministic allocation to the high type. We also provide partial results for the case of multiple interim types.
Keywords: sequential screening; ex post participation constraints; static contract; sequential contract
JEL Codes: C72; D82; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Static contract (D86) | Seller revenue (L85) |
| Sequential contract (D86) | Seller revenue (L85) |
| Buyer types (D16) | Optimality of contracts (D86) |
| Average profit-rent condition fails (D33) | Sequential contract must randomize allocations (C78) |
| Incentive compatibility constraints (D10) | Effectiveness of contract type (D86) |