Investment and Screening under Asymmetric Endogenous Information

This paper 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. Because uncertainty is endogenous, the equilibrium contract depends only on tastes, technology and on the strategic opportunities of both players.