Dynamic Screening with Verifiable Bankruptcy


Krähmer, Daniel (University of Bonn)
Strausz, Roland (HU Berlin)


We consider a dynamic screening model where the agent may go bankrupt due to, for example, cash constraints. We model bankruptcy as a verifiable event that occurs whenever the agent makes a per period loss. This leads to less stringent truth-telling constraints than those considered in the existing literature. We show that the weaker constraints do not af- fect optimal contracting in private values settings but may do so with interdependent values. Moreover, we develop a novel method to study private values settings with continuous types and identify a new regularity condition that ensures that the optimal contract is deterministic.


dynamic screening; bankruptcy; verifiability; mean preserving spread


D82; H57


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Dynamic Screening with Verifiable Bankruptcy
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