Investment and Screening Under Asymmetric Endogenous Information
Volume: Volume 35, No. 3
Issue: Autumn 2004
Pages: 502-519
Authors: Patrick Gonzàlez
Title: Investment and Screening Under Asymmetric Endogenous Information
Abstract: This article provides an analysis of screening contracts in a complete but imperfect information environment as opposed to the usual incomplete information (Bayesian) environment. An agent faces a hold-up situation while making a cost-reducing specific investment that is not observed by the principal. To prevent the hold-up, the agent randomizes his investment strategy and the principal offers a screening contract. The informational rents provided by the equilibrium contract finance the investment. For a large class of cost functions, the randomization is such that the marginal surplus follows a Power distribution.