Working Paper: CEPR ID: DP8629
Authors: Daniel Krhmer; Roland Strausz
Abstract: This paper considers the canonical sequential screening model and shows that when the agent has an ex post outside option, the principal does not benefit from eliciting the agent's information sequentially. Unlike in the standard model without ex post outside options, the optimal contract is static and conditions only on the agent's aggregate final information. The benefits of sequential screening in the standard model are therefore due to relaxed participation rather than relaxed incentive compatibility constraints. We argue that in the presence of ex post participation constraints, the classical, local approach fails to identify binding incentive constraints and develop a novel, inductive procedure to do so instead. The result extends to the multi-agent version of the problem.
Keywords: dynamic mechanism design; Mirrlees approach; participation constraints; sequential screening
JEL Codes: D82; H57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ex post outside options (D79) | optimal contract structure (D86) |
| optimal contract structure (D86) | principal's ability to extract value from agent's private information (D82) |
| ex post outside options (D79) | static optimal contract (D86) |
| ex post participation constraints (D72) | binding incentive constraints (D10) |
| ex post participation constraints (D72) | weakened incentive compatibility constraints (D82) |
| ex post participation constraints (D72) | suboptimal menu of contracts (D86) |