American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Sequential Screening with Type-Enhancing Investment
American Economic Journal: Microeconomics
vol. 14,
no. 4, November 2022
(pp. 25–57)
Abstract
Due to the well-known efficiency–rent extraction trade-off, the optimal mechanism in a pure screening environment (e.g., revenue maximization in auctions or cost minimization in procurement) typically calls for distortions in allocative efficiency when agents possess private information at the time of contracting. In this paper we introduce first-stage type-enhancing hidden investment to a standard sequential screening model of procurement, and find that (i) with convex investment cost, mitigation of allocative distortion must arise; and (ii) such mitigation can even be extreme with linear investment cost—procurement cost minimization must require social efficiency when the investment is sufficiently effective.Citation
Liu, Bin, and Jingfeng Lu. 2022. "Sequential Screening with Type-Enhancing Investment." American Economic Journal: Microeconomics, 14 (4): 25–57. DOI: 10.1257/mic.20200171Additional Materials
JEL Classification
- D44 Auctions
- D82 Asymmetric and Private Information; Mechanism Design
- H57 National Government Expenditures and Related Policies: Procurement
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