ICEF Research Seminar (JM) by Carlo Cabrera (LSE)

On Wednesday, February 6 ICEF held the Research Seminar (JM)

Speaker: Carlo Cabrera (LSE)
Theme: "Screening with Information Acquisition"

Abstract: We introduce information acquisition into a model of monopolistic screening. A seller has a single good to trade with a buyer whose value (i.e. type) is binary: high or low. The seller acquires information about the buyer’s value by observing arbitrarily many independent signals conditional on the buyer’s type at constant marginal cost. Both buyer and seller have payoffs that are quasilinear in transfers that are bounded: both sides face limited liability. A contract specifies, for each type report, the seller’s information acquisition strategy and a trading scheme, consisting of a probability of trade and a transfer, depending on the seller’s observation. We characterise optimal contracts in this setting. After a high report, the seller acquires no information, and allocates the good at a fixed price. After a low report, the seller acquires information as if she observed only a single signal with at most three possible realisations that determine the trading scheme. When at least one of the buyer or seller is not protected by limited liability, we construct simple contracts enabling the seller to extract surplus fully at vanishingly small cost. This construction applies to a large class of information cost functions, including all entropy-based cost functions, even when the buyer’s type is not binary.

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ICEF seminars