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Renegotiation and Optimality in Agency Contracts

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Author Info
Ma, Ching-To Albert

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Abstract

The author analyzes renegotiation in a hidden action principal-agent model. Contract renegotiation offers are made by the agent. A refinement is imposed on the principal's beliefs: if precisely one action is optimal with respect to both the principal's and the agent's contracts, the principal believes that the action has been taken. With the refinement imposed, perfect-Bayesian equilibrium allocations are identical to the second best in the classical principal-agent model without renegotiation. When renegotiation is led by the agent and when equilibria satisfy the refinement, equilibrium allocations are ex ante efficient. Copyright 1994 by The Review of Economic Studies Limited.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 61 (1994)
Issue (Month): 1 (January)
Pages: 109-29
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Handle: RePEc:bla:restud:v:61:y:1994:i:1:p:109-29

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  1. Aaron S. Edlin & Benjamin E. Hermalin, 1997. "Contract Renegotiation in Agency Problems," NBER Working Papers 6086, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Abraham Wickelgren, . "The Inefficiency of Contractually-Based Liability with Rational Consumers," American Law & Economics Association Annual Meetings 1061, American Law & Economics Association. [Downloadable!]
  3. Patrick W. Schmitz, 2005. "Should Contractual Clauses that Forbid Renegotiation Always be Enforced?," Bonn Econ Discussion Papers bgse26_2005, University of Bonn, Germany. [Downloadable!]
    Other versions:
  4. Mathias Dewatripont & Patrick Legros & Steven A. Matthews, 2003. "Moral Hazard and Capital Structure Dynamics," PIER Working Paper Archive 03-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  5. F. Gul, 2000. "Unobservable Investment and the Hold-Up Problem," Princeton Economic Theory Papers 00s10, Economics Department, Princeton University.
    Other versions:
  6. Steven Matthews, 2002. "Moral Hazard and Capital Structure Dynamics (joint with Mathias Dewatripont and Patrick Legros) Note the special time," Theory workshop papers 357966000000000095, UCLA Department of Economics. [Downloadable!]
  7. Dirk Sliwka, 2001. "On the Use of Nonfinancial Performance Measures in Management Compensation," Bonn Econ Discussion Papers bgse29_2001, University of Bonn, Germany. [Downloadable!]
    Other versions:
  8. Schmitz, Patrick W., 2001. "The Hold-Up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," MPRA Paper 12562, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  9. Schmitz, Patrick W., 2007. "Incomplete Contracts, the Hold-Up Problem and Asymmetric Information," CEPR Discussion Papers 6322, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Chong-en Bai & Yijang Wang, 1997. "Agency in Project Screening and Termination Decisions: Why is Good Money Thrown after Bad?," Boston College Working Papers in Economics 347., Boston College Department of Economics. [Downloadable!]
    Other versions:
  11. Schmitz, Patrick W., 2002. "On simple contracts, renegotiation under asymmetric information, and the hold-up problem," MPRA Paper 12530, University Library of Munich, Germany. [Downloadable!]
  12. Chong-en Bai & Yijiang Wang, 1995. "A Theory of the Soft-Budget Constraint," Boston College Working Papers in Economics 298., Boston College Department of Economics. [Downloadable!]
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