DP8629 The Benefits of Sequential Screening

Author(s): Daniel Krähmer, Roland Strausz
Publication Date: November 2011
Keyword(s): dynamic mechanism design, Mirrlees approach, participation constraints, Sequential screening
JEL(s): D82, H57
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8629

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.