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Renegotiation of Sales Contracts

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  • Matthews, Steven A

Abstract

This paper studies moral hazard contracts that may be renegotiated after an agent chooses an unobservable effort. Unlike in previous models, a contract contains just one scheme and the agent has the renegotiation bargaining power. All equilibria satisfying a weak forward-induction refinement are shown to be (second-best) efficient. Renegotiation necessarily occurs. If the effort set is rich, the initial contract must be a sales contract 'selling the project' to the agent. Thus, a party (the principal) who has an inherently weak renegotiation position should sometimes insist on a simple initial contract. Copyright 1995 by The Econometric Society.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 63 (1995)
Issue (Month): 3 (May)
Pages: 567-89

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Handle: RePEc:ecm:emetrp:v:63:y:1995:i:3:p:567-89

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  1. Allen, F. & Gale, D., 1990. "Measurement Distortion And Missing Contingencies In Optimal Contracts," Weiss Center Working Papers 26-90, Wharton School - Weiss Center for International Financial Research.
  2. Joseph Farrell., 1986. "Meaning and Credibility in Cheap-Talk Games," Economics Working Papers 8609, University of California at Berkeley.
  3. repec:fth:inseep:9302 is not listed on IDEAS
  4. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Grossman, Sanford J. & Perry, Motty, 1986. "Perfect sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 39(1), pages 97-119, June.
  6. KOHLBERG, Elon & MERTENS, Jean-François, . "On the strategic stability of equilibria," CORE Discussion Papers RP -716, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Hermalin, Benjamin E. & Katz, Michael L., 1990. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Department of Economics, Working Paper Series qt1678w3w9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  10. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
  11. R. E. Kihlstrom & Steven A. Matthews, 1988. "Managerial Incentives in An Entrepreneurial Stock Market Model," Discussion Papers 769, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
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  17. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
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Citations

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Cited by:
  1. Hiroshi Osano & Mami Kobayashi, 2003. "Double Moral Hazard and Renegotiation," KIER Working Papers 563, Kyoto University, Institute of Economic Research.
  2. Ching-mann Huang & Len-kuo Hu & Hsin-Hong Kang, 2005. "Compensation Design and Career Concerns of Fund Manager," Review of Quantitative Finance and Accounting, Springer, vol. 24(4), pages 379-397, June.
  3. Ohlendorf, Susanne & Schmitz, Patrick W., 2011. "Repeated moral hazard and contracts with memory: The case of risk-neutrality," MPRA Paper 28823, University Library of Munich, Germany.
  4. Luca Anderlini & Leonardo Felli, 1995. "Describability and Agency Problems," Game Theory and Information 9511001, EconWPA, revised 20 Sep 1996.
  5. Patrick W. Schmitz, 2005. "Should Contractual Clauses that Forbid Renegotiation Always be Enforced?," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 315-329, October.
  6. R. Amit & Parthasarathy Ramachandran, 2010. "A Fair Contract for Managing Water Scarcity," Water Resources Management, Springer, vol. 24(6), pages 1195-1209, April.
  7. Mathias Dewatripont & Patrick Legros & Steven A. Matthews, 2003. "Moral Hazard and Capital Structure Dynamics," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 890-930, 06.
  8. Francesco Squintani, 1999. "Moral Hazard," Discussion Papers 1269, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. F. Gul, 2000. "Unobservable Investment and the Hold-Up Problem," Princeton Economic Theory Papers 00s10, Economics Department, Princeton University.
  10. De Fraja, Gianni, 1999. "After You Sir. Hold-Up, Direct Externalities, and Sequential Investment," Games and Economic Behavior, Elsevier, vol. 26(1), pages 22-39, January.
  11. 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.
  12. Ohlendorf, Susanne & Schmitz, Patrick W., 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.

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