Sequential Screening with Renegotiation

Abstract

In this paper, I consider the problem of designing an optimal screening contract for a principal facing an agent whose type comes as a sequence that unfolds through time. Formally, the agent has a private ex ante type that stands for the expected value of his private ex post type. Under full commitment, the principal will first try to separate agents with respect to their ex ante type and will subsequently try to separate them with respect to their realized ex post type. While at the last period a traditional instruments is used to separate optimally the agent types, it is shown that such separation is achieved by resorting to a more or less efficient ex ante contracting scheme in the first period. Under no commitment, pooling always occurs with respect to ex ante types while in the case of commitment with renegotiation, the introduction of an ex ante adverse selection problem is shown to have a non trivial effect on the possibility of interim renegotiation in the second period.Adverse selection, Screening, Mechanism design, Renegotiation