Sequential screening with privately known characteristics of cost distribution

We consider a sequential screening problem where, in the contracting stage, the agent has private information on both the expected value and the spread of the unit cost of production. As the principal’s marginal surplus function becomes less concave / more convex in consumption units, information rents and quantity distortions in the optimal contract reflect progressively stronger concerns with the agent being eager to misrepresent the spread rather than the expected value. As long as marginal surplus is not very convex, relevant incentives to lie on each of the two information dimensions taken separately go in the same direction as in sequential screening problems where only the expected value, or only the spread, is privately known. Otherwise, unusual incentives come to matter. None of the contractual solutions, which are found for different principal’s preferences, reduces to familiar sequential screening mechanisms (Riordan and Sappington, 1987; Courty and Li, 2000). The solution is reminiscent of a multidimensional screening mechanism (Armstrong and Rochet, 1999) only if marginal surplus is sufficiently Convex.