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Contract, Mechanism Design, and Technological Detail

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Author Info
Joel Watson (UC San Diego)

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Abstract

This paper develops a theoretical framework for studying contract and enforcement in setting of complete, but unverifiable, information. The main point of the paper is that the consideration of renegotiation necessitates formal examination of other technological constraints, especially those having to do with the timing and nature of inalienable productive decisions. The main technical contributions include (a) results that characterize of the sets of implementable state-contingent payoffs under various assumptions about renegotiation opportunities, and (b) a result establishing conditions under which, when trading opportunities are durable and trade decisions are reversible, stationary contracts are optimal. The analysis refutes the validity of the "mechanism design with ex post renegotiation" program, it demonstrates the validity of other mechanism design models in dynamic environments, and it highlights the need for a more structured game-theoretic framework.

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File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1120&context=ucsdecon
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Publisher Info
Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number 2002-04.

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Date of creation: 01 Jan 2002
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Handle: RePEc:cdl:ucsdec:2002-04

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Related research
Keywords: renegotiation; productive decisions; mechanism design;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 57-82, January. [Downloadable!] (restricted)
  2. Maskin, Eric, 1999. "Nash Equilibrium and Welfare Optimality," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 23-38, January. [Downloadable!] (restricted)
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  3. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
    Other versions:
  4. Edlin, Aaron S & Hermalin, Benjamin E, 2000. "Contract Renegotiation and Options in Agency Problems," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 395-423, October.
  5. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
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  6. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 115-38, January. [Downloadable!] (restricted)
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  7. Kalai, Ehud & Ledyard, John O., 1998. "Repeated Implementation," Journal of Economic Theory, Elsevier, vol. 83(2), pages 308-317, December. [Downloadable!] (restricted)
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  8. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  9. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September. [Downloadable!] (restricted)
  10. Luca Anderlini, Leonardo Felli & Andrew Postlewaite, . "Courts of Law and Unforeseen Contingencies," Working Papers gueconwpa~03-03-26, Georgetown University, Department of Economics. [Downloadable!]
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  11. Yeon-Koo Che & Donald B. Hausch, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March. [Downloadable!] (restricted)
  12. Thomas P. Lyon & Eric Rasmusen, 2001. "Option Contracts and Renegotiation in Complex Environments," CIRJE F-Series CIRJE-F-118, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  13. Alan Schwartz & Joel Watson, . "The Law and Economics of Costly Contracting," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1004, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Oliver Hart & John Moore, 2004. "AGREEING NOW TO AGREE LATER: Contracts that Rule Out but do not Rule In," STICERD - Theoretical Economics Paper Series /2004/472, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
    Other versions:
  2. Joel Watson, 2006. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," University of California at San Diego, Economics Working Paper Series 2006-01, Department of Economics, UC San Diego. [Downloadable!]
  3. Bernhard Ganglmair, 2008. "Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking," JEPS Working Papers 08-001, JEPS. [Downloadable!]
  4. Roberto Serrano, 2004. "On Watson’s Non-Forcing Contracts and Renegotiation," Working Papers 2004-03, Brown University, Department of Economics. [Downloadable!]
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  5. Jim Brennan & Joel Watson, 2002. "The Renegotiation-Proofness Principle and Costly Renegotiation," University of California at San Diego, Economics Working Paper Series 2002-10, Department of Economics, UC San Diego. [Downloadable!]
  6. Joel Watson, 2006. "Contract, Mechanism Design, and Technological Detail," University of California at San Diego, Economics Working Paper Series 2002-04R, Department of Economics, UC San Diego. [Downloadable!]
  7. Schmitz, Patrick W., 2006. "Book Review of “Contract Theory” (Bolton and Dewatripont, 2005)," MPRA Paper 6977, University Library of Munich, Germany. [Downloadable!]
  8. Alan Schwartz & Joel Watson, . "The Law and Economics of Costly Contracting," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1004, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy. [Downloadable!]
    Other versions:
  9. Thomas P. Lyon & Eric Rasmusen, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Working Papers 2004-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
    Other versions:
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