Screening with Frames: Implementation in Extensive Form
42 Pages Posted: 28 May 2021 Last revised: 5 Oct 2021
Date Written: September 9, 2021
A principal faces an agent with frame-dependent preferences and designs an extensive-form decision problem with a frame at each stage. This allows the principal to induce dynamic inconsistency and thereby circumvent incentive compatibility constraints. We show that a vector of contracts can be implemented if and only if it can be implemented using a canonical extensive form, which has a simple high-low-high structure using only three stages and the two highest frames.
We apply our results to the classic monopolistic screening problem. Some types buy in the first stage, while others continue the interaction and buy at the last stage. The firm offers unchosen decoy contracts. Sophisticated consumers correctly anticipate that if they deviated, they would choose a decoy, which they want to avoid in a lower frame. This eliminates incentive compatibility constraints into types who don’t buy in the first stage. With naive consumers, the principal can perfectly screen by cognitive type and extract full surplus from naifs.
Keywords: Implementation, Screening, Framing, Extensive-Form Decision Problems, Dynamic Inconsistency, Sophistication, Naivete
JEL Classification: D42, D82, D90, L12
Suggested Citation: Suggested Citation