Turning the Ratchet: Dynamic Screening with Multiple Agents
We study a dynamic contracting problem with multiple agents and a lack of commitment. A principal who can only commit to one-period contracts wants to screen efficient agents over time. Once an agent reveals his type, the principal becomes tempted to revise contract terms, causing a "ratchet effect." Alterations of contracts are observable and, hence, whenever past promises are not honored future information revelation stops. We provide a necessary and sufficient condition under which the principal is able to foster information revelation. When players are sufficiently patient, the agents' private information is either never revealed or fully revealed in a sequential manner. Optimal contracts entail high-powered incentives after an agent's type is initially disclosed, and rewards for information revelation disappear in the long run.
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