Screening with Privacy on (Im)persistency

Abstract I study how private information on the evolution of preference interacts with the dynamic screening contracts in a principal-agent framework with short-term commitment. Privacy on the evolution of preference preserves the agent’s future information advantage, even following truthful revelation of preference. This relaxes the ratchet effects if the consumer’s initial preference is skewedly distributed and the evolution of preference is distributed sufficiently evenly, while it strengthens the ratchet effects if otherwise. Through its relaxation or strengthening of the ratchet effects, privacy on (im)persistency implies an improvement or distortion in the equilibrium revelation of preference. I also characterize the respective implications on the optimal contracts. Such privacy is not welcomed by all types of the agent, for it redistributes the information rent among different types. Privacy on the evolution of preference sustains in equilibrium, as it is not optimal for the principal to perfectly screen the (im)persistency per se.