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Contract Renegotiation: A Simple Framework and Implications for Organization Theory

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Author Info
Paul Beaudry
Michel Poitevin

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Abstract

This paper provides a unifying framework for studying renegotiation of contracts in the presence of asymmetric information. We show that interim renegotiation does not constrain the set of contracts attainable with full commitment, regardless of whether renegotiation offers are made by the informed or the uninformed agent. Ex post renegotiation, however, does constrain the set of attainable contracts. These constraints depend on the identity of the agent making the renegotiation offer. We then show how the theory of contract renegotiation can provide insights for organization theory. Specifically, we show how decentralization of decision making can be an optimal response to the threat of ex post renegotiation. Finally, we show that our framework can be used to analyse the trade-off between internal and external markets.

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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 28 (1995)
Issue (Month): 2 (May)
Pages: 302-35
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Handle: RePEc:cje:issued:v:28:y:1995:i:2:p:302-35

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  1. Michel Poitevin, 1995. "Contract Renegotiation and Organizational Design," CIRANO Working Papers 95s-03, CIRANO. [Downloadable!]
  2. Stefan Ambec & Philippe Barla, 2001. "A Theoretical Foundation of the Porter Hypothesis," CSEF Working Papers 54, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
    Other versions:
  3. Hendriks, Jean & Lockwood, Ben, 2005. "Decentralization and Electoral Accountability : Incentives, Separation, and Voter Welfare," The Warwick Economics Research Paper Series (TWERPS) 729, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  4. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics. [Downloadable!]
  5. Théophile, AZOMAHOU & Raouf, BOUCEKKINE & Phu, NUYEN VAN, 2003. "Energy consumption, technological progress and economic policy," Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper 2003025, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  6. Stefan Ambec & Michel Poitevin, 2000. "Organizational Design of R & D Activities," Econometric Society World Congress 2000 Contributed Papers 0190, Econometric Society. [Downloadable!]
    Other versions:
  7. Levent Koçkesen & Emanuele Gerratana, 2008. "Delegation with Incomplete and Renegotiable Contracts," TÜSİAD-Koç University Economic Research Forum Working Papers 0803., TÜSİAD-Koç University Economic Research Forum. [Downloadable!]
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