Pham, Hien (2021) Screening with Information Design and Heterogeneous Priors. TSE Working Paper, n. 21-1263

Abstract

This paper studies how heterogeneous priors shape contract and information design, and investigates the benefits of selling information. The model features a bilat-eral trade framework where the trading parties hold different beliefs about the corre-lation between the buyer’s private information and his valuation. The seller designs an information disclosure policy about the good and payments (trading prices and information fees) to screen the buyer. The simultaneous presence of information dis-closure and non-common priors gives rise to a novel source of revenue, the "posterior fictional surplus". As a result, the optimal mechanism balances gains and losses from this fictional surplus, apart from the standard virtual surplus. We also establish a sort of revenue equivalence theorem: in many cases, information fees are revenue irrel-evant. This finding extends beyond the main model, rationalizing why information is offered free of charge in many markets, and providing a new perspective on the benefits of selling information.