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Title: The Scope of Sequential Screening with Ex-Post Participation Constraints

Author(s): Dirk Bergemann, Francisco Castro and Gabriel Weintraub

Publication Date: June 2018

Keyword(s): ex-post participation constraints, sequential contract, Sequential Screening and static contract

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Bergemann, D, Castro, F and Weintraub, G. 2018. 'The Scope of Sequential Screening with Ex-Post Participation Constraints'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13018