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Sequential Screening and Renegotiation

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  • Reiche, S.

Abstract

This paper considers a sequential screening problem. A seller sells an object to a buyer who is privately informed about the object's value. The value has two components. The buyer knows the first component when he contracts with the seller and learns the second component only later. The optimal contract when there is no commitment problem is a sequential mechanism in form of a menu of fee-price pairs. Paying the initial fee gives the buyer the right to purchase the good later at the corresponding price. High initial buyer types pay a high fee for a low price later. Each buyer chooses a different fee-price pair. If commitment is not feasible, the structure of the optimal contract is simpler. The optimal contract is either no contract, a simple forcing contract, or a contract in which high types buy for sure and low types pay an initial fee to buy the good at a price later. The di¤erence to the setting with commitment is that all low buyer types obtain the same fee-price pair and all high buyer types buy for sure. There is no fine-tuning to specific buyer types. This might explain some simple real life sales agreements and why firms might find it optimal to group consumers into specific customer groups.

Suggested Citation

  • Reiche, S., 2008. "Sequential Screening and Renegotiation," Cambridge Working Papers in Economics 0820, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0820
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    References listed on IDEAS

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    1. Pascal Courty & Li Hao, 2000. "Sequential Screening," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 697-717.
    2. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
    3. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 509-540.
    4. Daniel Krähmer & Roland Strausz, 2011. "Optimal Procurement Contracts with Pre-Project Planning," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(3), pages 1015-1041.
    5. Andreas Blume, 1998. "Contract Renegotiation with Time‐Varying Valuations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(3), pages 397-433, September.
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