This paper shows that, contrary to what is generally believed, decreasing concavity of the agent’s utility function with respect to the screening variable is not sufficient to ensure that stochastic mechanisms are suboptimal. The paper demonstrates, however, that they are suboptimal...

Viscusi (1978) shows how, in markets with quality uncertainty, perfect certification results in separation from top down due to an unraveling process similar to Akerlof (1970). De and Nabar (1991) argue that imperfect certification prevents unraveling so that equilibria with full separation do...

We study the optimal hierarchical structure of an organization under limited commitment. The organization cannot make a long term commitment to wages and output levels, while it can commit to its hierarchical structure. We show that the optimal hierarchical structure is horizontal when it is...

This paper offers an explanation why a principal may demand too much paperwork from a subordinate: Due to limited liability and moral hazard a principal is unable to appropriate all rents. Internal paperwork allows a more accurate monitoring of the agent and enables the principal to appropriate...

We study the reasons and conditions under which mediation is beneficial when a principal needs information from an agent to implement an action. Assuming a strong form of limited commitment, the principal may employ a mediator who gathers information and makes non-binding proposals. We show that...

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004This paper provides an analytical framework for studying principal-agent problems with adverse selection and limited commitment. By allowing the principal to use noisy communication we solve two fundamental problems of...

Who does, and who should initiate costly certification by a third party under asymmetric quality information, the buyer or the seller? Our answer — the seller — follows from a non–trivial analysis revealing a clear intuition. Buyer–induced certification acts as an...

We study ex post information rents in sequential screening models where the agent receives private ex ante and ex post information. The principal has to pay ex post information rents for preventing the agent to coordinate lies about his ex ante and ex post information. When the agent’s ex...

This paper considers the canonical sequential screening model and shows that when the agent has an expost outside option, the principal does not benefit from eliciting the agent’s information sequentially. Unlike in the standard model without expost outside options, the optimal contract...