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| Volume 2,
No. 3,
December
2003 |
Back |
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A Didactic
Example of Linear (Multidimensional)
Screening Contracts |
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Ludovic Renou |
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Department of Economics,
European University Institute,
Italy
and
Economics Division,
University of Southampton,
U.K. |
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Abstract |
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This short paper proposes a didactic example on how to solve a
multidimensional screening problem in the linear case. In the
proposed example, shareholders of a cash-constrained firm propose
to the firm management a recapitalization in counterpart of the
distribution of future dividends. The capacity of the firm to
distribute future dividends depends on its production costs and
its technology, which are private information of the management.
Thus shareholders face a (multidimensional) screening problem. We
completely characterize the optimal menus of contracts that
shareholders offer. Notably, we show that there always exist
optimal menus of contracts with at most two contracts offered: a
low dividend, low recapitalization contract and a high dividend,
high recapitalization contract. This is an extreme case of
bunching. |
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Key words:
multidimensional screening; bunching; adverse selection;
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shareholders; dividends; recapitalization
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| JEL
classification:
C6;
D8 |
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