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Double moral hazard and renegotiation

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  • Osano, Hiroshi
  • Kobayashi, Mami

Abstract

We examine renegotiation in a double moral hazard model when both the principal and the agent are allowed to make a renegotiation offer to a self-interested arbitrator at the renegotiation stage even though the principal proposes an initial contract. Under a belief restriction, any perfect-Bayesian equilibrium leads to an allocation that is superior to the second-best allocation of the standard double moral hazard model without renegotiation. The result of this paper gives some reasons for the existence of intermediary organizations such as holding companies, law houses, consulting firms, investment banks or venture capital if it is costly to introduce a third party a la Holmstrom (1982). The result can also provide the rationalization for a fund set up by a group of firms of the industry in which their product is legally required to be recyclable.

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Bibliographic Info

Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 59 (2005)
Issue (Month): 4 (December)
Pages: 345-364

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Handle: RePEc:eee:reecon:v:59:y:2005:i:4:p:345-364

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Web page: http://www.elsevier.com/locate/inca/622941

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  1. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
  2. Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-53, November.
  3. Matthews, Steven A, 1995. "Renegotiation of Sales Contracts," Econometrica, Econometric Society, vol. 63(3), pages 567-89, May.
  4. Ishiguro, Shingo & Itoh, Hideshi, 2001. "Moral Hazard and Renegotiation with Multiple Agents," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 1-20, January.
  5. Ching-to Albert Ma, 1990. "Renegotiation and Optimality in Agency Contracts," Papers 0004, Boston University - Industry Studies Programme.
  6. Hiroshi Osano, 1999. "Implementation of multi-agent incentive contracts with the principal's renegotiation offer," Review of Economic Design, Springer, vol. 4(2), pages 161-177.
  7. Osano, Hiroshi, 1998. "Moral hazard and renegotiation in multi-agent incentive contracts when each agent makes a renegotiation offer," Journal of Economic Behavior & Organization, Elsevier, vol. 37(2), pages 207-230, October.
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