Screening with Frames: Implementation in Extensive Form

42 Pages Posted: 28 May 2021 Last revised: 5 Oct 2021

See all articles by Franz Ostrizek

Franz Ostrizek

University of Bonn - Department of Economics; briq- Institute on Behavior & Inequality

Denis Shishkin

University of California, San Diego (UCSD)

Date Written: September 9, 2021

Abstract

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

Ostrizek, Franz and Ostrizek, Franz and Shishkin, Denis, Screening with Frames: Implementation in Extensive Form (September 9, 2021). Available at SSRN: https://ssrn.com/abstract=3854111 or http://dx.doi.org/10.2139/ssrn.3854111

Franz Ostrizek

University of Bonn - Department of Economics ( email )

Bonn
Germany

briq- Institute on Behavior & Inequality ( email )

Schaumburg-Lippe-Straße 5-9
Bonn, 53113
Germany

Denis Shishkin (Contact Author)

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

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