Dynamic screening with verifiable bankruptcy

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 affect 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.